From Scarcity to Surplus: Geopolitics in the Age of Energy Abundance

Speakers discuss burgeoning U.S. energy production and how changing energy markets are reshaping U.S. foreign policy.

MORSE: So welcome, everyone, to today’s session. We’re having what I think is going to be a very good set of comments and discussion on “From Scarcity to Surplus: Geopolitics in the Age of Energy Abundance.”

Most of you know who the two speakers are, but I’m delighted that this is a time when Amy Jaffe, who has just now become the David M. Rubenstein senior fellow for energy and the environment at the Council, has her fist meeting in that position here today. And of course, Meghan is celebrating the publication of her—of her newly-published book about this revolution in the energy sector and its multiple implications.

So what we’re going to do is start with a couple of comments. Amy’s going to tell us about what her plans are for energy and environment events in the near term at the Council, and then Meghan will briefly summarize what she thinks are the lead takeaways from her book, and then we’ll go into a bigger discussion.

JAFFE: Well, I’m really excited to be here, and look forward to interacting with all of you in the coming months and years. We are going to be sort of embarking on looking at how the digital economy and the new economy is really going to change how we produce and use energy, and the competition among players, and the geopolitical implications of that, which we’re already sort of seeing some of the outlines in the market. And Meghan has really addressed in her book how some of that’s changing.

And then do a deeper dive with all of you, with your input, on, you know, what does that mean for U.S. foreign policy, how should we be adjusting our diplomacy, and how do we incorporate understanding of how the energy system’s going to change over time and transportation patterns are going to change over time, and you know, how is that going to move us to a really different geopolitical place.

MORSE: Great.

O’SULLIVAN: Great. Well, thank you and good evening. It’s always a pleasure to be here at the Council, but it’s a special pleasure to be onstage with Amy and with Ed. And I’m very pleased to have the opportunity to talk to you about this subject, which is a subject, I think, that just keeps on giving, and that’s the intersection between energy and global affairs. And so, as Ed mentioned, I’ll just very quickly give you maybe five takeaways from the book as setting the scene, and then allow us to kind of move into a more fulsome discussion.

So the first thing I would say about the book—and this is an audience, I think, that will be sympathetic to this idea—the book is making the case that energy is a big driver of international affairs. And of course, this has been true for a long time. We moved from wood to coal, and coal to oil, and now we’re in a transition to something else. But I mean, this has never been more true is what I’m arguing in the book, because we have seen such dramatic changes in the energy landscape in the last few years. And we should expect that when there is such a transition and such changes in energy markets that they’re going to reverberate into the realm of international politics. And that is what we see and what the book talks about.

The second point I want to leave you with is I’m trying to convince my reader of the necessity of looking at the world both wearing a foreign policy lens and an energy market lens. And I’m trying to make the case, which I think is a very strong one, that if you’re only wearing one of these lenses, you’ll only see part of the picture. You’ll only see part of the story. And actually, there’s a relatively small number of people who inhabit both of these worlds. And we can talk about why that’s the case, but I like Bob Jervis. He has a theory that, in fact, if you don’t understand something, you tend to downplay its importance in explaining events. And if you talk to foreign policy people about contango or backwardation or some of these energy market terms, I think most people will turn off. These are foreign words, but not foreign languages in the sense that are welcomed from the foreign policy community.

The third point I make in the book is that we have a tendency when we’re talking about this energy revolution to look at price, and that makes a lot of sense. That’s easily accessible to everybody. It’s been very dramatic over the last few years. But really we need to look at more than price, we need to look at the structure of markets. And the structure of oil and gas markets in particular have changed very dramatically in the last five or 10 years, and those changes have had a lot of foreign policy implications.

So my fourth point really is kind of a grand point about how those changes in markets have influenced alliances, it’s influenced the sources of power of different countries, it’s influenced opportunities for collaboration, and it’s influenced prospects for conflict. So it really has not been an American phenomenon, but it’s really had influence throughout the world.

And then the last point I would make is that there are lots of—and I kind of don’t like the phrase, but it’s hard to get around using it—there are lots of winners and losers from these changes in energy abundance in the realm of global politics, but America comes out really on top here. And that’s not just because this energy boom is good for the U.S. economy, but it is also because this boom has changed the strategic environment in a way that is, on the whole—not exclusively, but on the whole I would say—conducive to American interests.

So those are some of the broad themes of the book. I drill down in a lot of different ways on the specifics and different geographies. But I look forward to discussing that and other issues in this conversation and beyond.

MORSE: Great. Thanks, Meghan.

And what we’re going to do now is I’m going to engage both of them in a discussion. That’s always a dicey thing because they are both—

O’SULLIVAN: He says we talk too much, you know? I—(laughter)—

MORSE: I was—I was not going to be, you know, that direct in what I was going to say—(laughter)—but they tend to be hard to moderate. (Laughter.) And we’re going to be having a discussion—

O’SULLIVAN: Hard to moderate. That’s the—that’s a (posed phrase ?) here.

MORSE: —among us for 25 minutes, and then we’ll open it up to you. And I think I’m going to start with where you ended, Meghan, and then Amy will chime in.

So you talk about, you know, this transformation in a system where the U.S. has become a central hub in the energy world. And you go into this in the book, both with respect to oil and natural gas. And you coincidentally have this book published about three months after the U.S. government started talking about a policy of energy dominance. So what does a policy of energy dominance actually mean? And how, from a policy perspective, does one with some sensitivity try to take advantage of this new dislocation and relocation of the U.S. in the—in the international energy system?

O’SULLIVAN: Great. I mean, it is coincidentally, without any quotes around that, that these two things have happened together.

I think energy dominance, if you ask the Trump administration, there’s a very strong relationship between increasing oil and gas and coal production, that that’s really what I understand the Trump administration to mean when they’re talking about energy dominance. I am trying to encourage people through this book to think about energy dominance or related—you know, a related concept much more broadly.

So, yes, part of it—if you want to take advantage of this strategic boon for the United States, part of it involves increasing and maintaining production in oil and gas and possibly coal, although I don’t go into that quite as much. But I would say you need to look even bigger, that a real strategy of energy dominance wouldn’t be just about producing more fossil fuels. It would look at the whole energy landscape, and it would also think about how do you take advantage of the strategic environment that is created by these big changes in energy, and it would also have to take into account a lot of non-energy policies.

I think one thing that we haven’t at least seen a lot of evidence of is a realization that there are a whole raft of U.S. policies which are not considered to be energy policies which actually have a big impact on our energy prowess here at home. I mean, take, for example, our policy towards Mexico. So we think about this maybe not in energy terms. We think about it maybe in terms of immigration or other things. But the stance that this administration has taken towards Mexico has really engendered Mexico’s own kind of populism, and there’s a risk that next year Mexico will elect a president who will actually be interested in reversing the historic energy reforms, which won’t only be bad for Mexico, but it would be bad for the U.S. and the U.S. energy industry because Mexico is our by far largest consumer of natural gas. So I think if you’re really looking at an energy policy, you would look at not just how to maintain or increase production, but look at how your other policies influence energy and look at how energy creates new opportunities for you around the world to advance non-energy interests.

MORSE: Amy?

JAFFE: Well, I would agree with everything Meghan said, and I would expand it a little bit and sort of broaden, you know, what does energy allow us to do. You know, we’re talking about mobility or military activity, you know, these different things that are enabled by energy supply. And when you have to depend on some other country for your energy supply or your mobility, it leaves you with a vulnerability. So now all of a sudden the United States is hoping over time to have no—none of that vulnerability, that we’re going to control our own destiny, and then we will have the lever. Not that we would use it in a negative way, but we are going to be the provider of these needed services in terms of fuel and power and so forth, meaning electrical power.

So the interesting way of thinking about that, though, is I agree with Meghan you have to look beyond just fossil fuels. And of course, we’re all traditionally 100 percent usually focused on oil. It’s all about oil, right? But because we’re seeing new technologies, the question is, does China compete in that same world even though they don’t have the resources that the United States or Russia have? Because they’re going to compete with the technologies. They’re going to have an industrial policy. So when China exports solar panels at the rate that they do, does that compete with natural gas? Because, actually, natural gas and solar now compete in the marketplace for supply of electricity. So is China’s exports of solar panel(s), is—they’re kind of like the Qatar of solar panels—competing with Qatar, which is selling natural gas? So you have this sort of broadening.

And when you think about truck technology, you know, car technologies, advanced automobile technology, you know, does it matter whether the United States not only has competing, you know, more prolifically with Russia or Saudi Arabia in the oil and gas sphere, but do we also need to compete in these other spheres like mobility services? Does it matter that the American companies are the ones that dominate ridesharing? You know, are we going to have ridesharing services all around—in major cities all around the world? Is that going to matter? And do we have to be playing in that arena? Do we need that goal with the IT that does with that? Do we need to be able to keep our ridesharing services and automobiles safe in the United States from cyberattack from another country? I mean, it’s a much broader picture today than just our old way of thinking about 1973 oil embargo, how do I make sure I’m not vulnerable to a producer that would threaten to use oil as a weapon.

MORSE: You look like you want to come back into this discussion, Meghan.

O’SULLIVAN: No, no. I’m yielding to the moderator.

MORSE: OK. (Laughter.) We’ll see how long that lasts. (Laughter.)

We know that the U.S. has become a dominant factor in the market: the largest exporter of petroleum products in the world, the largest exporter of LPGs, soon probably to be the largest exporter of natural gas. What happens to the old order? Does it just roll over and lie dead, or does it fight back? You spend a good bit of time at the beginning of the book talking about the old order and OPEC, and Amy and I have certainly written at least half-a-dozen articles on OPEC is dead, it just doesn’t want to admit it. But what happens to other market participants—Saudi Arabia, Russia—their relationship with one another? And what happens to that old order that didn’t want markets to operate, but wanted to take advantage of inefficiencies in the market?

O’SULLIVAN: Well, I think we’re at a moment where a lot of things could happen. There are people, as I mention in the book, who believe the new order, as I call it, is going to be fleeting, and that actually the old order will reexert itself. And I think that depends on some assumptions you make about investment and demand and technology. And you could make the case that this will be a blip, and that demand for fossil fuels will continue to grow robustly, and that shale will really be limited in terms of how much it can bring to market, and that a certain point these forces will overwhelm the new realities that I describe.

I, of course, am not a big subscriber to that. I believe a lot in technology. I actually think that if I were a big producer I’d be thinking pretty seriously about when demand actually does flatten out for oil. We saw this week China actually indicate that it’s thinking about a timeline when it will phase out the production or the sale of fossil-fuel-driven cars or petroleum-based cars. So I think all of these things suggest that we are looking at energy abundance being the dominant characteristic for the long term.

Now, the classic way that these—let’s take the oil market because the oil and the gas market are, of course, quite different. The oil market, you’d think the classic way that these players might fight back would be to try to keep the price as low as possible, to try to forestall any efforts to really move into renewable energies, into vehicles—electric vehicles, that type of thing. But I think the impetus to move in that direction, the transition that the world seems interested in making in the transportation sector—where, of course, oil is the most dominant—has gone beyond the price mechanism. There are other things also driving this transition.

There’s pollution. So France and Britain this summer also banned—or not banned, they set a timeline: 2040, no longer going to be selling petroleum or diesel cars. And a lot of that was not about climate, wasn’t about altruism; a lot of that was about pollution.

And then the point that Amy made about how a lot of these countries, and China in particular, see the move towards electric vehicles and new technologies that could displace oil eventually, but certainly natural gas in the shorter term, that this is a—this is a technological advantage, but it’s also a geopolitical advantage. And so I think that there aren’t as many tools as one would think to forestall this shift to the new order.

One thing that I know is of interest to all of us up here is the possibility, well, are there going to be new relationships built? And is Saudi Arabia going to find greater common cause with Russia? Are they going to be able to, together, somehow forestall this shift to the new order? I think that remains to be seen. I think there’s a lot of interest on the part of Russia. I’d love, Ed, if you would violate moderator rules and maybe say a word or two about this from your perspective. I think the Saudis are more skeptical about what can be gained from this kind of bilateral cooperation in energy markets. So that, I think, remains a very interesting open question.

MORSE: So, Amy, as you answer the same question, put yourself in the position of, you know, Moscow or Riyadh. And this is—this is not a problem, it’s an existential crisis. And as an existential crisis, you know, how does one react, from a government perspective?

JAFFE: So it is—fundamentally, it’s absolutely existential. And I like to sort of cast—when you ask the question is the new—old world order over forever, this is how I describe how over it is, in a very specific way. For 30 years, when I—you know, Ed and I were first looking at this and people were talking, people wanted to explain to me the world oil order. People would explain to me that this easy oil was going to run out, right, and the United States was going to deplete its oil, Europe was going to deplete its oil, all the oil was going to get depleted, and then we’d be dependent on Russia and the Middle East, and they’d be able to charge whatever number they wanted. And the idea was if you were, say, in Kuwait, you know, you should hold the oil under the ground, or in Mexico, for future generations because in the future generations—which would be now—the oil’s going to be worth a lot more money than it was in 1980 or 1990. So we can afford to make these OPEC agreements and, you know, bide our time. Well, now, with the shale revolution and the possible coming of these new technologies, whether it’s renewables plus battery cars or whatever, now I can’t actually count on depletion. I don’t know if depletion will ever happen. In the end, it’s possible that depletion’s not the storyline. And what that really means is that oil under the ground could someday depreciate over time, not appreciate over time. And that means that it’s a disadvantage to me if I don’t produce it now, right, because it’s going to become less valuable over time if I hold it under the ground.

So, now the question is, really when you hear the OPEC members or Russia and OPEC talking about this concept of a freeze, right, if you think about every country, if Iraq, Iran, Saudi Arabia, Kuwait, Russia were to all decide to take every barrel out of the ground now while there’s still a market, the price of oil would go much lower than we’re seeing. And could these countries really survive those prices? And so there’s this real management element to what level of production can I agree to live with and you agree to live with so that we don’t just, you know—just, you know, have a mass suicide, you know, among oil producers. And managing that and not giving a number that gives the United States producers a huge advantage—I mean, $50 was way too high; $50, you know—and the American industry’s very ingenious in terms of its applying more and more technology, and you know the production’s just going to go up and up and up. So figuring out what that number is has been a real challenge for OPEC. But structurally, the idea that there’s not going to be depletion completely changes the old world order, and I don’t think there’s a way to go back.

Now, when I look at Russia today, you know, I think the Chinese have done an amazing job. They have their One Belt, One Road strategy. They have built all these ties. And now they’re going to, you know, button it down with transportation, with railroads, with infrastructure. They’ve locked down the Caspian. They’ve encircled the Russians, right? They’re building trade ties to the EU. Their trade with the EU is probably much more important, in the end, than Russia’s trade with the EU on some level, especially if the Europeans can get more and more energy from the United States or other sources, or even from renewables. So what China has basically done is they’ve encircled the Russians into like a vassal state. And to the extent that the Russians have all this energy that they can’t know they could sell over the long term, right, I mean, like the Chinese have, like, cornered them. And now in a way—in something that the Russians said they’d never do. They said they’d never sell a major stake in a Rosneft or one of their companies to the Chinese. And they’re just—you know, they just did that last week because they’re desperate, right?

So the interesting question that I have when I look at Russia is they’re so focused on us—you know, they’re going to hack our election, they’re going to destabilize democracies in Europe, they’ve got this whole chaos, you know, strategy that they’re applying that make them seem very powerful and very important in the global domain, and they’re 100 percent focused on that. And they are basically mortgaging their future to China by, you know, taking this policy to the extent that they’re allowing—they’re not coping with the threat that’s really in their economy, which is really so tied to energy.

MORSE: So you’ve just described what Meghan spends a couple of chapters on. One is that China’s a winner and Russia’s a loser, by and large. And I know you don’t like to use those words, but you used them. So let’s turn to Russia before going back to China.

O’SULLIVAN: Sure.

MORSE: And define in what ways Russia is a potential loser in all of this.

O’SULLIVAN: Sure. Right at the time of the price crash, I think a lot of people expected that the Russian economy was not going to be able to withstand low prices, because it is such a resource-dependent economy and the price plunge was so dramatic. And the Russians have actually done a better job, I think, than a lot of people expected, in part because their currency depreciated so dramatically that it allowed them to keep the things going better than people expected. And again, this is where I say if we just look at price we miss a big part of the story.

So the ways in which I think Russia is a loser, so to speak, on this front has a lot to do with markets. So Russia still is going to be—by most scenarios, going to be the major exporter of natural gas to Europe. But what we should care about, as people who are really interested in foreign policy and influence in the world, is that Russia may still be selling a lot of natural gas to Europe, but it is doing so under very different market terms. And so Russia has been forced to negotiate things that it swore it would never negotiate, and Europe just basically has other options for acquiring natural gas if it needs to. So the Europeans may say we’re going to keep buying from Russia, but we have confidence because of some of the policy changes they’ve made and because of the big changes in global natural gas markets being more fluid, being more integrated, that if push comes to shove we have alternatives. And so that means that Russia may still have trade, but it can—it has a much harder time politicizing that trade or using that trade as a political weapon, so to speak.

Another area where I think Russia has really suffered or its plans have really suffered has been in the Asian realm. So I think Russia has focused on Asia. Even if you go back before the price plunge, you go back before Crimea, you see that Putin was talking to the Russian energy industry and saying we need to look east, that the future is in Asia, and that we’re going to start trying to really tap into the demand growth that we expect to see in Asia. And now what we’re seeing is that the Russians are really struggling to do that. And part of the reason for that is in a lower-price environment a lot of the projects that they thought were going to feed Asian markets just aren’t commercial anymore. These big Arctic projects, big LNG projects, big greenfield projects, they just don’t make as much sense to develop when the world has a lot of other places from which it can get natural gas or even oil. So I think this pivot to Asia—you know, we talked about a pivot to Asia; I think Russia really wanted to do a pivot to Asia—is really frustrated by this—by this new energy climate.

MORSE: So what are the other options for Russia?

JAFFE: You know, I think the Russians are really, you know, in a bad place. I mean, they have this one commodity or two, you know, oil and natural gas, and they haven’t, you know, done what they need to do to reform their economy to diversify it. Same thing in the Gulf, right? So you have this depreciating asset. You have this possibility. In the Russians’ case, it’s worse than for the Middle East because, as Meghan points out, it’s an extremely expensive asset, and it may never be producible.

MORSE: Go ahead.

O’SULLIVAN: No, we’ll keep going.

MORSE: Before we open it up—and I’m going to go off the script that we had talked about earlier. We have now a world with three countries that are kind of dominating in the oil sector, two of them in the gas sector as well. And we have the U.S., which is anything but a petro-state. Energy is, you know, less than 9 percent or 8 percent of the economy. And the other two are really petro-states that are dependent on revenue for government spending, revenue directly out of this extractive sector. One of them, Saudi Arabia, which we haven’t talked about a lot, has a policy put in place to diversify the economy, to get themselves out of this. And Russia has none to get themselves out of it. How do you, each of you, think this dilemma of a petro-state will work itself out in terms of wherever you want to go, the reliability of either the Kingdom or Russia as a supplier to the world?

O’SULLIVAN: Let me say a little bit about the Kingdom because it is such an important story, and really such a dramatic story that their very, very ambitious efforts to reform, I think as Amy described, really have their root in the fact that the Saudis have realized that these oil markets have changed in a fundamental way. And whereas before if the price went down they just had to wait for it to go up, now they realize there’s maybe no going up. And that calls into question their economic model and, transitively, their political and social model.

So I would say that the Saudis have huge stakes. This is the existential question in Saudi Arabia, in my mind, is are they going to be able to achieve these reforms?

And as you pointed out, Russia has no such plan. I mentioned a poll in my book. I think it was 2012. It was before Crimea, before the price plunge. And a lot of Russian experts were asked: If the price of oil were to fall precipitously, what would happen in Russia? And almost all of them said, well, this would lead to diversification of the economy and to reform. But this is where the politics piece really comes in. That is assuming a different kind of politics in Russia.

So going to the triumvirate question, I think that what will be interesting here is if the United States can really begin to see that it has big interest in Saudi Arabia succeeding in these reforms, because if Saudi Arabia doesn’t succeed in these reforms I think the future for the Kingdom, and therefore the region and likely the world, is a lot darker. So a Saudi Arabia that doesn’t succeed—and I’m not talking about every single objective being reached, because if you read the 2030 plan, it has objectives like every Saudi should exercise four times a week or—(laughter)—you know, things like that. I was like, how about every American exercising four times a week? (Laughter.) So not everything. But above a certain threshold, if Saudi Arabia isn’t successful, I think we are looking at a Kingdom—(audio break)—

JAFFE: (In progress following audio break)—you know, I’m not saying that the price of oil couldn’t go back up for a year because, you know, some catastrophe happens in a country and demand is—

O’SULLIVAN: Like Venezuela.

JAFFE: Venezuela. You know, demand is high for a year or two, you know, as we’re transitioning. I mean, that can happen. We’re not out of the woods, you know. We’re probably going to see—you’re going to all come to a meeting and we’re going to be talking about, you know, the $150 oil thing again, I’m sure. But basically, you know, you really raised the right question, which is, you know, is partly maybe the way Russia’s behaving internationally, which sometimes to the outside observer seems a little reckless—you know, is that because they’re like boxed in and they have no options? Like, realistically, you know, how do you get them into a soft landing?

MORSE: So now it’s time for members to ask questions. This is a particularly interesting membership group tonight since there are people in this group, a lot of them—a lot of you who have spent all of your lifetime looking at oil and gas issues. So don’t hesitate to speak up. But remember when you speak up that this is an on-the-record meeting, and please state your name and make your comment or ask your question. So who wants to start?

Q: George Hopley, Morgan Stanley.

I was curious, how would you look at, which lens, the floating of shares of Aramco? Would it be a policy or markets, or maybe a desire for quarterly SEC and Wall Street discipline? Or how would you look at that?

O’SULLIVAN: Sure. I’ll take the first shot at that. Again, my plea to you is to, you know, employ both lenses because you’ll get different dimension of the problem, the solution by looking at it through both market lenses and political lenses.

Here I would say—let me just comment on the political side. So you could look at this just as a market proposition, you know. This is something that the Saudis are going to do. They want to raise money to fund the public investment fund, and that will make investments that will provide—how they’re looking at it is that will provide kind of a ballast to the oil economy. Things that are—it will make investments that are not necessarily correlated with oil. But if you look at it from the political side as well, I think you can see it as part of the young crown price’s effort to change the culture in Saudi Arabia.

I kind of referred to the fact that these economic changes will also require social and political changes in order to be effective. And when I visited Saudi Arabia a few times in the last year, I would often meet with my former students, and I would talk to them about the reforms that are going into place that will remove subsidies on energy or water or other things, and how do you feel about that was my question. And they would often say we understand that’s a necessity, but we’re interested in knowing what are we going to get in return. So kind of a transactional thing. If the royal family revises the social contract, what’s in it for us?

And when I would ask what would you like to be in it for you, the answer I often get is more transparency, more—a better understanding of where the riches of the Kingdom are going, how the royal family is benefiting. And I think that this effort to float some shares of Aramco is going to necessarily force more transparency into the system. And I don’t think that is a coincidence, and I certainly don’t think that—you know, who am I to speak for the crown prince, but I don’t think that’s a downside, from his perspective. I think that’s part of a forcing function that he sees as necessary in order to reform the Kingdom as a whole.

JAFFE: So the risk he faces—I mean, it’s an interesting strategy, and it does, you know. It can bring this transparency. It’s sort of like when Pemex did bonds or other things. There’s a certain amount of reporting that comes with it. You can say some external force is telling you you have to operate in a certain way, even in terms of spending and costs and, you know, all kinds of things, and decision-making.

The problem is that if it’s also a strategy to sort of sell forward your reserves because you’re not sure how long—for how long you’re going to able to monetize them, you know, by asking the market to value it, right, you know, you run the risk, well, what happens politically. I mean, if everything goes well and the market values these reserves well, no problem. Got the cash, you’re doing reforms, you’re saying that you’re going to generate more transparency. But if the market doesn’t accept your ideas for valuation, then the consequence could be quite negative. I’ve told young people in my country that we’re going to monetize this so that we can invest in the Ubers and new different things, and we can be like other leaders in the Gulf who have invested wisely resources, and now they have the earnings of the sovereign wealth fund to carry them for future generations and train people into new activities for the future. But if it turns out disappointing, then what’s your next step, right? Then you have—you’ve pinned everything as this, you know, pride and joy, cornerstone idea. And if the markets don’t give you the numbers—the kinds of numbers that you said, is that going to cause a disquiet for the whole 2030 plan, right? So it is really important that it be done well and that judgments be made about the market’s acceptance of the shares.

MORSE: Another question.

Q: One of the curious things that I wondered about—

MORSE: Please tell us who you are.

Q: Oh, yeah. It’s Richard Thoman, and I’m Corporate Perspectives, Columbia University, and the Fletcher School. And I know Meghan from the Trilateral Commission.

One of the curious things I’ve always had is, where did this natural resource boom in the United States come from? Why did it happen here and nowhere else? And the way it’s been explained to me is under U.S. law property rights belong to the owners of the property at a state level, so every state can decide what it wants to do and the individual owners of the property can decide. Most of the rest of the world, the mineral rights belong to the state, and therefore those states tend not to want to irritate their own green groups and others. Would that indicate that the ability of other places to replicate what we’ve done in natural gas is highly unlikely, just because of the structure of property ownership?

JAFFE: So I’m going to take that one. You know, that’s something that the oil industry tells itself to feel that, you know, there’s not going to be, like, a crisis of abundance, right? And, you know, some of it is you have these technologies and it was sort of a learn by doing technology. You know, I like—ConocoPhillips’ chairman said, you know, we’re playing baseball; we’re only the first inning.

But there are countries—take, for example, Russia. I mean, Russia has immense shale, and they have, you know, pretty extensive industry. And if they were to make a commitment to develop their shale and if something were to change in terms of their, you know, external relations in terms of getting the finance and whatever it is that they need, they could be a really giant player. And the fact that the mineral rights are, you know, in the commanding heights of the Russian central government wouldn’t matter at all, right? So there are going to be some places where it’s just not going to matter.

And, you know, we’re seeing, you know, in Britain or in France or in Germany, you know, maybe this is a much more controversial issue. But I think it’s going to be a mixed bag. And like many things, I’m thinking I don’t want to do it until I get into a situation where I actually would really need the energy or I have some economic motivation. And it would be really interesting to see what happens in the politics of Mexico, because one of the easiest places to have the shale go up and be produced extensively would be Mexico because literally on the other side of the border is the same exact formation. In Russia, people have to do research about that specific geology, and there’s been some failures in Poland and a few places. But the Mexican resource is literally just an extension of this prolific resource that’s being produced in South Texas. So that could be done relatively easily, relatively quickly if the Mexicans had the will to create an investment environment that would encourage people to do it.

MORSE: Additional comments, Meghan?

O’SULLIVAN: Sure. I would point out I think it’s a very interesting perspective, Amy, that this is what oil companies tell themselves so they don’t have to worry that this will be replicated elsewhere.

I do think that if we look back to, say, just 2012, there were some real big ambitions that other countries had about their ability to replicate what happened here in the United States. And there’s a couple of countries that are producing at commercial levels, and that’s Argentina and China and Canada. But this—you know, Argentina and China, it’s very, very small, small quantities still. And the reasons why it’s been so difficult to replicate, some of it has to do with the property rights issue you raised, but there are a whole realm of, I would say, additional institutional components that led to the U.S. success that have been hard to replicate in other places. You know, it has to do with prices. It has to do with availability of finances. It has to do with the fact that these were small, nimble companies that were able to adjust their approaches very, very quickly. And in a lot of other parts of the world, it’s actually national oil companies who are—you know, have been kind of charged with leading this effort, and it turns out they’re much more interested in developing other kinds of resources.

All that said, I would just conclude by saying I still think that we will see other parts of the world develop these resources, maybe not exactly as the United States did. We’ve realized this is not a cut-and-paste type of solution, but that in many places there is a strategic impetus to do so. And I think that over time they’ll figure out how to do it a little bit more—you know, not exactly as America did it, but a little bit more to be conducive to some of their own institutional factors.

MORSE: Yeah, I’d like to make a couple of additional observations on this subject.

You know, the ownership of mineral rights is important, but the fact that Canada has one-tenth of the production of the U.S. and they don’t have the same private ownership of mineral resources indicates that there are other institutional factors at work.

And I think, in a way, Meghan and Amy together did articulate, but I want to reinforce what they articulated. One is this has been a small-company phenomenon. And part of the reason it’s a small-company phenomenon is that a lot of experimentation has to take place, and it still has to take place because every rock formation is different from every other rock formation. And you need to have a line of command that delegates authority on drilling decisions pretty far down the ladder, which is unlikely to be the case in any national oil company and probably unlikely to be the case in any very large, highly-capitalized company. So that’s part of it.

Another part of it is the fact that in this U.S. setting with so many highly innovative entrepreneurial individuals running small companies, they don’t have the cash flow to take the risks to do this, and they need a fairly robust financial services sector to provide risk capital. And it’s risk capital. It’s not project financing. It’s a very different animal. And that’s not easily found in many other environments.

Daniel.

Q: Hi. Daniel Ziff —

MORSE: Wait for the—

Q: Sorry. (Comes on mic.) Jumped the gun. Daniel Ziff, Ziff Brothers Investments.

One question. I really noticed several phrases calling into question the social and political model of some of these producing countries. And when you look at what’s happened in Venezuela, the oil price has been low for three years. You talked about Russia not having a plan, talked about Saudi Arabia perhaps needing to do very difficult reforms. If the price stays low for five years, 10 years, some extended period, what are the chances there isn’t a fracture in some major producing nation that’s dependent upon this oil revenue to keep the peace with its people or whatever? But it just seems like the pressure’s been very intense very quickly. The tragedy in Venezuela is already happening. What are the chances that that doesn’t continue to happen in perhaps multiple countries?

JAFFE: So, I mean, I kind of made allusions to that. I mean, the chances of our having a straight line down to me seem very slim.

So the way I describe it to people is the expectation, if you imagine we have a boom-and-bust cycle in oil—which, you know, my book, “Oil, Dollars, Debt and Crises,” is a little bit about how the boom-and-bust cycle’s really 100 percent connected to the geopolitical cycle, right? So I get a lot of wealth, I spend that wealth on arms. That sets me up when the price of oil then goes down to the—to the bust. I use those arms to, like, prop myself up, and I create the crisis that takes us back to a boom. So, you know, we have—the general economic cycle kind of goes along with it.

But if you—if you think about what you’re saying, what you’re really saying is we could have another supply crisis again. So imagine that people imagine this boom-and-bust cycle, and what the Middle East and everybody was telling us for 30 years was we’re going to have this boom-and-bust cycle, and the line was going to slope up over time. So it’s going to go up and down, up and down. But imagine it’s going up and down off of an axis that’s basically leaning up.

And what I’m telling you in my opinion is going to happen now is we’re going to have the same boom-and-bust cycle around the kinds of things you’re saying, because if prices stay under pressure, you know, Venezuela’s regime absolutely will not be able to survive, right? I mean, people in the oil industry are already starting to pull credit away from some of these operating companies. So, over time, you know, it doesn’t even matter whether we have sanctions or we don’t have sanctions. The markets are going to eventually treat Venezuela like—you know, like a bank going under, you know, back in the—in the ’80s and ’90s.

So, to me, what the boom-and-bust cycle is going to do now is it’s going to be going down a sloping line, right? So you’re still going to get these upswings, but people need to not get confused about whether the upswing is still going to come down to a lower and lower number over time. Each up is going to be slightly lower, maybe, but each down might be more down. And that’s what I would sort of say to you about, you know, how it’s going to play out, because we know that the next time prices go up, how many more people would consider buying a plug-in car?

You know, when I saw the news about Harvey and Rita (sic; Irma), thinking about Rita and Katrina, you know, my first thought was my sort of—as a former Houstonian, you know, the first thing you do when you see something like that’s happening is you run out and fill your car, right, because you don’t want to be left without fuel. And then, of course, that creates—most people—believe it or not, average Americans drive on half a tank. So you can imagine when you multiply it by 350 million, if everybody goes out and fills up on the same week, it creates a lot of demand, right?

So my thought was, well, you know what, guys, I just moved here from California. I still have one of these hybrid dual-fuel cars. I got a car that I can plug in every day and do local driving. So I started to realize, look, I’m going to be one of the few people not affected, right? The rest of you might be in line for gasoline if Colonial didn’t come back up. I was going to be able to just plug in in my garage, right?

So the next time we have a crisis, if it looks like that, all my neighbors are going to see that I can drive them to the grocery store and they’re going to buy that car. And then that’s going to bring a cycle where these—Meghan says, well, you know, is it really uncertain? Maybe demand for oil will still go up. But not if there’s going to be another supply crisis and people are going to realize that there’s a benefit to have an electric car, or better yet what I have, which is a car that will run on either electricity or oil, right? So I think that the next time one of these countries or two of these countries or three of these countries go down at once and it turns the market around, that is going to be just like a lit fuse under all these technologies that the Chinese are betting on, right?

MORSE: Meghan, any comment?

O’SULLIVAN: Well, I would say that if we look at the OPEC report that came out this week, a monthly report, it actually reinforces a little bit of what Amy said and what you were implying. So this was the first month, or August was the first month since April that OPEC production contracted. And it did that not because of a new agreement or new political cooperation. It did that because Venezuela’s production went down, Libya’s production went down, and Iraq’s production went down. And so these are all kind of geopolitically-induced contractions. And, you know, I think we will—we will see more of that. Venezuela, I think, is definitely heading in that direction.

So I’m not sure exactly where you wanted to go with your question, but if it was, well, we haven’t seen any state collapse yet but that doesn’t mean we won’t in the future, I think it’s correct that we have to look at oil producers in different categories. So the Saudis, you know, certainly the Emiratis, the Kuwaitis, the Gulfies in general, had a lot of ability to cope. They had enormous reserves that they could tap into. And the Russians actually had some national funds as well, which have not quite run out but have kind of stretched out the runway for them. But if prices, you know, do stay low for a long period of time, a lot of these coping mechanisms will no longer be available. And so it’s still possible that we’ll see some, you know, state collapses that we can attribute to having their roots in this price crisis.

Q: (Off mic)—from Blackstone.

You spoke a little bit about winners and losers. And I was wondering, I mean, it’s obvious what it means to lose, but what does it mean to win in a context where on the one hand we seem to be seeking energy dominance, but on the other hand there’s substantial risks associated with failed petro-states like Venezuela and maybe Saudi Arabia, or even Russia down the road?

O’SULLIVAN: Maybe I could take that by talking about China for a moment. So when I’m talking about winning—and here I am getting cornered into the winner-loser rubric—but when I talk about winning, I’m thinking, again, not just economically and not just in terms of energy balances, but I’m talking strategically. So if you were trying to describe to someone what has driven Chinese foreign policy over, say, the last 25 years, a pretty easy way to explain it is that most leaders before Xi Jinping in China would say we’re a developing country, we have a lot of challenges, we’d prefer just to kind of focus on what happens within our own borders. And it was really the only thing that drove China outside of its borders and required it to really get engaged in the rest of the world was the need to secure energy, because China didn’t have sufficient amounts of energy, and oil in particular, to fuel the economic growth that was needed to support the political stability in China. So you had a pretty—it’s simplified, but a meaningful equation of energy to fuel economic growth to support the Communist Party and political stability. And that was really a big, big focus of Chinese foreign policy.

In this new world of abundance, I think the Chinese are still concerned, making sure that they get the energy they need, because they’re more dependent than ever on external sources of energy. But this world of abundance has created a lot more space for them to reprioritize, and to direct their efforts and their strategic objectives in other directions. So it’s the confluence of this new energy environment and new leadership with Xi Jinping that the Chinese can actually spend a lot of time cultivating relationships abroad, making investments that don’t have anything necessarily to do with energy, but maybe are more focused on exporting excess capacity from Chinese companies, which I think is a big impetus behind the One Belt, One Road initiative, a big impetus behind the continued investment that we see from China in Africa. So I think the—it has reduced constraints on China and created opportunities for China to pursue kind of a more robust role on the world stage.

So that’s one way I would describe being a winner, which is a very broad way. But that’s, again, you know, what my book talks about, is like how this energy piece really connects to big strategic foreign policy issues.

JAFFE: So just to look at it from the U.S. perspective to complement what Meghan’s saying about China, you know, we were like a double loser in the last two decades because if there was a crisis in the Middle East or in one of these regions, not only would we have to spend the money to militarily intervene, right, we would then have the negative impact on our economy of having to import more oil, having the price of that be higher, hurting our—you know, our current account, the trade deficit, and all the things that would then signal Wall Street, you know, negatively. And so you had this linkup between this cycle of this sort of, you know, war in the Middle East, you know, creating a deficit of spending, we’re raising our military spending, at the same time, you know, Wall Street’s getting these negative signals with the dollar and all these different things, and we wind up with a financial crisis, right? And the toll it’s taken on our country has been really extensive, I mean really extensive.

Now all of a sudden you can kind of see, like, your way out of it. It’s like we’re still in the pit, but we have a ladder and, you know, you could see how you would climb out of it. So the next three times it would happen, if it happens again, right, more and more money would pour into Texas or Ohio or Pennsylvania, right? And instead of just sending all that money to Saudi Arabia or all that money to Russia or Iran and Iraq, you know, a lot of that money can stay here in the U.S. economy. And then, because we have agreed, I think smartly, as a policy to be an exporter, we’re going to have export revenue from sending some of that—more and more of that energy, you know, out to other countries.

So this pattern that we’ve been in is going to change. And to the extent that we have to have an internal dialogue in this country about, you know, what are we going to do as all these countries—you know, if they do collapse, I mean, we can’t—I think one of the, you know, most disheartening experiences has been, you know, our inability to help countries as they’re collapsing, you know, to turn around, right? So I do think as a—as a matter of diplomacy, we really need to get prepared for the non-military solution, right? The situation for Saudi Arabia is a non-military solution. It’s like how do we reach out to this younger generation?

In my opinion, you know, the younger generation that came out on television to look for American assistance in Syria, you know, this is going to go in history as just a horrible tragedy what happened to those young people. You have a whole generation of Syrians—I mean, it’s just unspeakable what’s happened to young people in that country.

MORSE: We’re moving toward the end of our time. We have about a minute and a half to two left. One last question, please.

Q: For many years—

MORSE: Could you—

JAFFE: Jerry (sp) Pollack.

Q: Gerald Pollack.

For many years in the oil industry, concern was about peak supply: When would peak supply be reached? But now it seems that the attention has shifted to peak demand. What’s your view on reaching peak demand at a time when prices are low, but the world’s population is still growing, and in the developing countries at least incomes are rising?

MORSE: I would note, as Meghan’s going to answer, part of the book is about the supply side, but the other part of the issue on the world of surplus is on the demand side. So you’ve got the last word.

O’SULLIVAN: OK. And I’ll make it brief.

I think this is the right mental shift to make, right, to be less concerned about supply, because we now know that there are huge, vast resources that the world can produce at a commercial price. But then the shift is, OK, well, what is the demand piece going to be? And I talk about in the book how the supply side has been this first wave of energy abundance, but I anticipate that there will be a second wave. And that second wave will be driven by demand factors and it will be driven by new technologies, growing efficiency, and a growing seriousness of the world to take into account climate change and other things.

So the real question is: What’s the time frame for this to happen? I think there’s a lot of debate out there, and it’s really interesting to see how much of the world is focusing on that.

My last trip to Saudi Arabia, which was not—it was within the last year, was the first time that people started asking me repeatedly, well, give me your view on electric cars, you know. That’s the piece that really matters for oil demand, not solar, wind, and these other factors, so to speak. It really is electric cars.

So I think there’s still a lot of debate about what the time frame is. But the fact that this is a concept that big producers are starting to think about means that the strategic mind shift—the strategic mindset has shifted. And that in itself has massive geopolitical implications.

MORSE: Like all Council meetings, this one has to end on time. And just as we get into a whole range of issues that could engage us for at least another hour, let alone examining some of the issues that we kind of picked up and dropped.

So thank you, Meghan. Thank you, Amy. And we look forward to more meetings. (Applause.)

JAFFE: Thank you.

O’SULLIVAN: Thank you.

(END)