Why you should care
We wish we didn’t, but we all depend on black gold.
Even six months ago, the question about oil was, How low will it go? Now, with crude prices at $52 a barrel, the question is, How long will low prices last?
When it comes to understanding the oil market’s crazy gyrations, it helps to talk with someone like Dan Yergin. I first encountered Yergin’s name when, as a graduate student, I read a paper that he’d written on the theory of nuclear deterrence. Remember that? So I was surprised a few years later when, living in London and covering energy, I met Dan Yergin the oil guy, co-founder of Cambridge Energy Research Associates and soon-to-be Pulitzer Prize-winning author of The Prize, an engrossing granular history of the oil industry and the amazing personalities who built it. I asked him — same guy? Yes, for sure.
Yergin, who is now vice chair of the research and consulting firm IHS (which bought Cambridge Energy a few years back), remains a man of many interests. He’s co-authored a book on the worldwide intellectual and political battle over government and markets (The Commanding Heights), another on the future of Russia (Russia 2010) and yet another solo on energy’s most recent history (The Quest). Last week, OZY sat down with Yergin to get his take on what the longer-term energy future might look like. An edited version of our conversation follows.
OZY: What’s changed in the oil market and surprised you?
Dan Yergin: One surprise has been the resilience of U.S. tight oil, or shale oil. People in OPEC and elsewhere thought shale was high-cost oil. It turns out it’s not. The high-cost oil — that’s the big, long-term, multibillion-dollar megaprojects. So U.S. production has been resilient. It actually has gone up this spring. It could cycle down but go up again, because it’s short-cycle and very responsive to price — very different from the five- or 10-year multibillion-dollar project.
OZY: Anything else weighing on the market?
D.Y.: If Iran comes back, that’s going to put a lot of supply into the market. The debate now is whether the Iranians will be prudent or whether they will just go for market share. If they go for market share, that would be a downward pressure for prices. I think we’ll only know when they do it — and they’ll only know when they do it. A lot depends on the state of their rivalry with Saudi Arabia at that point.
OZY: What’s the big picture?
D.Y.: Fifty percent of the growth in world oil markets between 2004 and 2014 was in China. You have to go back to 2004, when oil was going to 20 dollars a barrel forever, and it took off, and the big surprise was Chinese demand growth. Chinese demand became an underlying assumption of not just oil, but investment in all commodities, and it led to overcapacity. And in oil, of course, the new capacity came from the United States in ways that it was just not expected. U.S. oil production at the end of last year was 90 percent higher than it had been in 2008, and just the growth in U.S. oil production since 2008 was greater than the output of every single OPEC country except Saudi Arabia.
OZY: So is cheap oil here to stay?
D.Y.: This two-year period is where we’re going to see a lot of volatility. When the price goes up, people are going to assume it will continue going up, and when it goes down, they are going to assume it will continue to stay down. Where we’ll see the impact three or four years from now is in the postponements, delays and cancellations of big megaprojects — the conventional, big offshore projects.
OZY: Where does it hurt?
D.Y.: Those who will struggle with low prices and volatility — aside from the companies — are governments that assumed they held all the high cards: would-be oil and gas states, like in East Africa. They thought they could get 85 or 90 percent of the revenues and make high demands for local investment. Now the competition is going to be not so much among companies, but among countries seeking investment. Many of them haven’t realized that yet. Mexico is attuned to the new reality. It’s competitive and wants to draw in investment, but you could see a country that could be producing more natural gas, Ukraine, demanding terms that make people say they won’t invest. They’ll go elsewhere.
OZY: What’s the long-term future?
D.Y.: There will be worldwide peak oil demand. We think it’s going to be in the 2030s. If you have a really strong commitment and you are willing to pay for it, like Germany, you can accelerate it. If you just look at the car ownership in emerging markets versus car ownership in the United States, that’s where you’ll see the growth until then. Still, you see in the U.S. the younger generation, millennials, don’t have the mad passion for automobiles that was part of the rite de passage for 16-year-olds here 20 or 30 or 40 years ago, because they are too busy in the virtual world on Facebook and social networks, and that’s where their imagination is.
An earlier version of this article incorrectly stated that China contributed to 60 percent of the increase in world demand. Mr. Yergin says he misspoke in the interview.