The 1st IISS-Citi India Global Forum
India as a Rising Great Power:
Challenges and Opportunities
New Delhi, 18–20 April 2008
Fifth Plenary Session:
Energy Security
Energy Supply and Demand and the US
J Robinson West
Chairman & Founder, PFC Energy, US
(Provisional transcript as delivered)
Introduction to Robinson West’s Presentation
Dr John Chipman
Thank you very much for that analysis and that stern word of warning, the intensity of which we will want to debate. I am delighted now to ask to come to the podium Robinson West, the Chairman and Founder of PFC Energy. He had a long and distinguished career in government, beginning with the Reagan administration in numerous positions, including in relation to energy. It is also interesting for everyone here to note that he is the Director of the US Institute of Peace (USIP) as well. The USIP has been an occasional collaborator with the IISS in many ways. We look forward to continuing that with Robinson West in the future.
Robinson West
Chairman and Founder, PFC Energy, US
I am in the unenviable position of being the last speaker in the last programme. After you hear my words, I think you will dash not to the restaurant but to the bar. Carrying on from Liam’s comments, I have some serious things to say. Energy is a serious problem.
‘Energy’ is one of those words like ‘love’ and ‘finance.’ It means different things to different people. I will focus on oil and gas as these are subjects I know about. Energy security is described as ‘the reliable supply at a reasonable cost in an environmentally sustainable manner.’ By that definition we have now entered the age of energy insecurity where you have unreliable supply at an unreasonable cost in an environmentally unsustainable manner. Why?
Basically what has happened is that there has been a huge cut in spare capacity in the international oil markets. We have a little over two million barrels a day of spare capacity almost entirely in Saudi Arabia, out of a worldwide production of over 83 million barrels. In the late 1980s, we had over nine million barrels per day. Therefore, there is no cushion or shock. When there are problems in Nigeria or other parts of the world, the market reacts violently.
The other thing is that prices have rocketed up and there has been no response. The fact of the matter is that 94% of the oil is held by state oil companies. This goes back to nationalisations that took place in the 1960s and 1970s. The structure of this business is entirely different than it used to be. Most of the governments that control these national oil companies are taking the money; they are sucking it out of the business and they are not reinvesting it back into the business. The one notable exception to that is Saudi Arabia where they are expanding their production by approximately two million barrels a day from 10.5 to 12.5 million barrels.
The international oil companies are the most profitable companies in the history of the world. The challenge they have is that they cannot reinvest because the governments control the resources. Also, the demand is different. We now have demand in Asia and the Middle East, which is structurally not discretionary. There are tremendous forces. As the economy grows, demand will grow with it. We are heading for a production crunch. I did not see the article in Survival, that John Chipman mentioned, but we call it a production crunch.
It is not that the oil is running out . There are still many molecules in the ground. However, the world is running out of oil production capacity. Oil is the only industry in the world where international capital cannot flow to the most efficient production. We believe that the international petroleum system, given the political structure and given existing technology, cannot generate more than 95-100 million barrels a day. Christophe de Margerie from Total gave a speech on this a couple of months ago that caused quite a stir.
There is a limit to the international petroleum system’s capacity. By the same token, we see demand that is mushrooming. The question is: when does this crunch hit? If the markets grow at approximately 1.2%, then it will probably hit at around 2020. If the markets grow at 2.4% - which is a very high growth – then it will probably happen around 2012 to 2015. In the oil business, that is tomorrow. These big projects cost billions of dollars and take 8 to 10 years to develop. I do not want to get caught up on the timeline, but directionally something terribly important is happening. We are inevitably heading towards a time of tremendous strain and difficulty caused because of this production crunch.
The question comes up: what about renewables? Everybody likes to talk about wind and solar power, and things like that. In the US we had a recent flurry with the renewable fuel of corn based ethanol. It is an unmitigated fiasco coupled with an Australian drought and a change in diet, and food prices have mushroomed all over the world. There are a number of these different technologies, such as wind and solar, but it is not clear whether they are economic. Even if they are subsidised, you cannot get the scale that you need from them.
One of the things that people fail to understand is simply how big the oil industry is. We have been spending something in excess of $100 billion for over 100 years. To quickly replace that is virtually impossible.
We therefore have a tremendous challenge. Another problem is that politicians, on the demand side, refuse to deal with the problem. Last week in the US, one of the politicians suggested taking the few pennies off the price of gasoline this summer so that Americans could drive a little more. Likewise, here in India, the politicians subsidised the price of gasoline. This is really unsustainable.
This is not the end of the world, but it will create intense economic, political and technical challenges. It is good that there are admirals and generals and government officials. This is going to be a big challenge for everyone. There will be huge pressures, not just in oil and gas, but in the economy and political and military issues as well.
Energy and the environment are issues which always run together. They should. However, I have bad news. If you raise the price of energy substantially – and it is rocketing up – then it will make it that much more difficult to impose carbon regimes. It not because people do not want action; I think they do. What happens in most places is, however, that they either do not want to or cannot pay for it. It is difficult to see how politicians are going to impose higher carbon prices when the basic price of the commodity is rocketing up at the same time. This is a tremendous challenge. It is a challenge that most politicians are completely unprepared to confront.
One of the answers is technology. The irony is that this is the one area controlled by politicians and it has been completely, utterly and thoroughly mismanaged. To give you an example, in the US in the last 25 years, we have spent over $50 billion in energy research. We have nothing to show for it. It is too bad we wasted the $50 billion. We can get that back, but we cannot get the 25 years back. There is some real urgency here. Research has to be changed. We have to put more money into it. All the candidates want to put more money into research, but none of them has an organised programme. Research must be properly managed by real professionals and not treated as political patronage by politicians. It must be prioritised and it must be depoliticised. Every candidate is in favour of more research, but no candidate has thought this out.
This is a real opportunity. What is also unrealistic is that politicians always want painless solutions. There are going to be no painless solutions. The question is: how do you manage the situation? Those of us in the industry believe it is very unlikely that there will be breakthroughs in new forms, particularly of liquid fuels, on the scale that is needed. Where the breakthroughs are going to happen will be on the demand side. We believe there are enormous opportunities to save tremendous quantities on demand. The consumers would tend to agree with this as well. They are not stupid. In the US, the Toyota Prius now outsells the Ford SUV, which until recently had been the most popular car in the US. The consumers are ahead of the politicians.
My charge had been to talk about the impact of energy policy on US and Indian relations. The US does not have an energy policy. Our policy has been, basically, to inadvertently encourage consumption and discourage production. It is an absolutely mindless policy, but it was pain free and it is what the politicians wanted to give the people. We are going to have to take action. Energy and the environment come very high in the polls in the US, but I think it is going to be very difficult for politicians to act on carbon and the energy issue until a real crisis hits.
Where do the politicians stand? John McCain is very much in favour of nuclear energy. Hillary Clinton is anti nuclear. Obama is kind of neutral. They all want to deal with climate change, but they are not really prepared to confront the issue of price. On the climate change issue also, if China and India are not part of the regime, there will be no political action in the US. That is simply a fact.
All candidates want to decrease the dependence on foreign oil. All are in favour of energy independence, but they cannot define it. The way that McCain would tend to work is more through market forces. Obama and Hillary Clinton would try to use regulation more.
We are confronting a production crunch. There are going to be many problems in the Middle East. We are going to need a lot of help. This is a huge opportunity for India and the US to get closer. We really need each other and we can really help each other. It is important that India and the US are seen as being part of the solution and not part of the problem. There is a good chance of that. In terms of research and demonstration projects, there is a chance for the US and India to work closely. India can be America’s real friend and we can be a champion for India in such areas as technology.
My clients in the oil business complain that the energy business is becoming too risky. My response is that with risks there are opportunities and rewards. As with companies, so it is with countries.
