 Today, we put the scenario, the oil abundance scenario, to the test. Two months ago, I sent around emails to the analysts who were behind these reports, who were behind the theory that we're talking about, and I asked them, are you willing to be challenged on stage, live, all at the same time, all at the same place? The response was enthusiastic. So it is that today we're privileged to have six of the energy thinkers to put, to scrutinize the age of oil abundance. This session is on the record. It's being broadcast live by C-SPAN 3. It's being webcast live on the New America website. If you please turn off your phones, or turn off the sound on your phones, if you wish to tweet from today, please use the hashtag, delve into 12. So let's begin. The first session, which will scrutinize the golden age of oil abundance, is going to be moderated by Michael Levi, who runs the energy and security program at the Council on Foreign Relations. Thanks for inviting me to moderate this panel. That's a ton of feedback. Thanks. I think Steve's put together a fantastic structure for today's discussion. We're going to have two components to it. This first one is really about kicking the tires on scenarios of oil abundance, understanding what assumptions go in, what factors might affect outcomes, and trying to decide how plausible, how likely these are. And then the second, we'll talk about the consequences. And so we'll separate those two pieces, I think, in order to have a really rigorous discussion. In order to first talk about where we are heading and where we might be heading, we have two fantastic panelists, discussants with us. The first will be Adam Saminsky, administrator of the U.S. Energy Information Administration, who was previously briefly senior director for energy and climate at the National Security Council staff, and before that, for seven years chief energy economist at Deutsche Bank. Adam will be giving us essentially the base case. EIA is sort of the gold standard for government forecasts of the energy world, and he'll be talking to us about what they see in the future. The second presenter will be Ed Morse, who is managing director and global head of commodities research at Citigroup. And really the man responsible for identifying a lot of the trends that we're all talking about now and really trying to flesh them out. When everyone else is putting out three-page papers on the issue, he's putting out 100-page ones. I don't know whether his staff enjoys that, but it is a benefit to all of us in giving us really robust data and information to talk about. He's previously served as head of commodities research at Credit Suisse, chief energy economist at Lehman Brothers, and as deputy assistant secretary of state for international energy policy. So no more introductions. Adam, you've got eight minutes to tell us your view and the EIA view on the future. Ed, you'll have eight minutes, and then we'll have a chat. Are we going to have the slides? All right. Do we have the technical help that brings up the slides? Otherwise, I'll do it without the slides. Well, this is a good opportunity to thank... Is this working? No. Now it's working. Okay. And there are some slides. They're in good shape. Okay. I'd like to thank the New America Foundation for the forum. It's a great opportunity. Steve and Michael, thank you. And Ed, it's always a pleasure to see you. In the very quick amount of time, I'm not going to spend a lot of detail on these slides, but I just want to set the scene, and I'm going to particularly use the U.S. as an example. But let's start off with some world numbers. This comes from the EIA's annual energy outlook that was just published just a little bit ago. We're looking at global demand growth between now and 2035, going from roughly 89 or 90 million barrels a day now up to 110 million barrels a day. Almost all of that growth is going to be in the non-OECD countries, and that has interesting implications that we can come back to. This is kind of fascinating to me. This is just the next few years. But look at where the main growth in non-OPEC production is, the United States leading the table here with tremendous oil and oil liquids growth in 2011, 2012, and 2013, followed by Canada and Russia, China, Colombia, Kazakhstan, Brazil, all of these countries are likely to continue to see production growth, we believe, out into the future, and that has implications that we'll be getting into. How is this happening in the United States? Tidal oil production in places like the Bakken and Eagle Ford formations growing very, very strongly into 2012, and likely to continue along those lines as the industry gets more comfortable with tidal oil development. How much tidal oil production we could see in the U.S. is going to depend, at least in part, on what the actual reserve base is, it's still early days, looks pretty good. If we, in the EIA reference case, that will support a certain level of production, but a high estimated ultimate recovery case or a high total reserves case could push production or potential production numbers up even higher. The reference case is the darker shade here, but as you can see, there are a number of cases, particularly with high reserves, where net petroleum imports shrink quite a bit as you get out to 2025 and 2035. Obviously the net imports number is going to depend on not just domestic supply, but what's happening with demand as well, so let's, you know, again look at some of the possibilities here. The reference case in the EIA's annual energy outlook for the U.S. shows dependence on imported petroleum will shrink from about 50% in 2010. Right now we're already down below 45% to 36% in 2035. If we were to take the high production case and combine that with the low demand case that number could be 14% down close to 3 million barrels a day, it's not impossible to think of some cases that would lead to even further shrinkage and dependence on net imports. If you had higher oil prices and more conservation, if you had stronger fuel efficiency standards, if you had better technology in the demand sector, including things like how much oil is being consumed and home heating or in commercial heating, all of that could lead to further shrinkage in that import number. One thing that I think that you should keep in mind in all of this and I'll close on this topic is a bit of caution in terms of interpreting what it would mean if the U.S. were to become self-sufficient in oil. The Harvard Kennedy School just published a report a month ago suggesting that even if the U.S. were totally oil independent, we would still be dependent on global oil markets in terms of price setting and the critical importance of Middle East and foreign policy issues would not go away despite the potential for oil imports to shrink considerably. So with that, I'll close and we'll turn it over to Ed now, I think. Don't put it up. I'm going to use the slides, so thank you very much. Thanks very much, Steve, and the Foundation for setting this up, and thank you, Adam, for setting the stage. What's happening is a really big deal. I'm not going to talk about foreign policy issues right now. We're going to have time for that later, but trying to deny that this is a big deal is like trying to deny that the Internet would have significant implications. This is what's unfolding is truly a technological revolution assisted by entrepreneurial capacity among a bunch of independent companies in North America and the capital markets of North America that have, with the assistance of higher prices over the last decade, been able to exploit geology that was hitherto outside the scope of mankind. It's not just the shale-like resources of North America. There are three levels of unconventional resources that high prices allowed technological innovators to tap into, and these are clearly the deep water. They are the oil sands, particularly in Canada, and they are the tight formations from which shale and source rock has managed to escape, not completely escape, but to escape into slightly more porous rocks that new technology can make even more porous and enable the world to tap into. And we know the scope of the source rock. We know more or less the scope of the resource base. We don't yet have a technologically defined set of numbers about commercial resources. So just to put the technological revolution in kind of perspective, even though the resource base for the shale-like oil plays only a slight increment for the U.S. resource base, the source rock itself is many times larger than the amount of oil that is commercially available globally. If there's a trillion and a half barrels of oil that are available globally, there's a trillion and a half barrels of oil. Source rock in place, in Wyoming, there's a trillion and a half in place, in Utah and Colorado, and there clearly is at least in terms of what will be commercial 100 billion barrels, and that's kind of enough in North Dakota, Saskatchewan, and Montana. This is a big deal, and it's not just America. It is the world as a whole. Our report looked at North America, and it's important for North America. Our numbers are significantly less conservative than those of the Energy Information Administration. We looked at what is potentially available, and by the way, our numbers on Mexico show a different profile than the numbers Adam showed from the EIA, which quite conservatively show a continued decline in Mexican production. I think the world is going to find at the end of the year that Mexican production will be up year on year from onshore production. There are discoveries offshore and deep water that have just been announced. The full results of experimentation and the extension of the Eagleford from Texas through the other side of the border are just becoming publicly available, and there's no reason to assume that the geology won't work, what there's reason to be somewhat skeptical about is whether a company like Pemex can do what the independent entrepreneurial companies of North America can do. Let me be very specific about this. What has allowed this to work and what makes it difficult for this to work in a company like Pemex or Saudi Aramco or even Exxon is that the entrepreneurial independence empower people at a significantly low level in the hierarchy to make decisions about drilling and to experiment on drilling, and this enables the entrepreneurial companies to do things that others can't do. Now, what has triggered this clearly was on the natural gas side. What's happening on natural gas is truly important and cannot be ignored because if we look at the oil balances in North America, we have to think of where natural gas is going to by the end of this decade almost certainly start displacing oil consumption. One of these, by the way, is in natural gas vehicles, and it's probably going to unfold pretty quickly and probably in the heavy-duty truck fleet. So I want to just make a note on this and we can talk about it later. The economics of converting the heavy-duty truck fleet from diesel to natural gas are compelling. There's about $7,000 to do the conversion without having a new rig, without having a new engine, and that $7,000 can be made up more or less in a year because depending on where in the U.S. you might be able to get LNG or CNG for a truck, and that is a big issue. It costs in comparison to a $4.5 per gallon diesel, you can have the equivalent amount of natural gas feeding for somewhere between $1.10 and $2.50. So the economics on that are really compelling, and we in looking at potentially a $2 million barrel a day decline in U.S. consumption have a not very aggressive conversion of the trucking fleet from diesel into natural gas. I want to talk about what triggered this revolution. It was high prices. The high prices certainly had an impact in North America, first with the shale gas play, but it is really global, and when Robin and I were trying to build a petroleum finance company in the early-19, mid-1980s, one of the first things we were able to do is get a contract with the World Bank where we looked at investment cycles in the oil industry, and we looked at the things that go into capital expenditures. There are six things that go into capital expenditures on the upstream side. Those six things explain a lot about the peak oil fad, and they explain a lot about what is happening. The total capital spending in the world on the upstream side peaked in today's dollars at $200 billion in 1981, and then sharply fell off as oil prices fell off. Among the six elements of upstream capital spending is enhanced recovery, extending the life of a field, low prices make that uneconomically to the early abandonment of a field, leads to an increase in decline rates, and we saw that one of the areas of capital expenditure is an acreage acquisition. Companies were long on acreage in 1981. They lived off of that length in acreage for two decades as the price of acreage, the cost of it went down in 2003 for a bunch of reasons related to OPEC. Companies thought it was wise to start investing. I have two minutes, and they started increasing capital flows by six-fold, and the results of that are just coming home to roost. So what's happening in North Dakota and Texas and Ohio and Pennsylvania on the gas side and the oil side and the NGL side is a reflection of the results of CAPEX globally. When it's happening in the deep water as well, it will happen in the deep water Gulf of Mexico again as drilling activity has now resumed. It's a big lead time between the release of the capital and the results of it, and the chart on your right shows that for most years before 1980, 1984, the amount of oil discovered excluding extensions and revisions to old discoveries was more than the amount of oil consumed for this period of years in which the industry was living off of old investment, the amount of oil discovered was less, and now the evidence is clear that discovery rates are significantly higher than and will remain significantly higher than oil consumed for a period of time to come. What's required to keep this going is clearly high enough prices. This is a map. It can't be seen, but it's the 250 most recently discovered fields and their economics. Most production in today's prices can be done at $70 a barrel. Some of it can't be done if prices fall much below $70 a barrel. One has to ask a question about the sustainability of oil prices, which is another issue, but if oil prices are sustained at a robust enough level, there's plenty of evidence that the production growth that we've seen can continue. Thanks very much. I want to try and dig down into some of the assumptions behind these cases, but I want to start by actually asking each of you when you look at the other's case, what are the one or two biggest differences not in the outcome, which we can see in the total numbers, but in the assumptions that go in. Do you see as the biggest factors explaining the difference in the projections? Maybe Adam, I could ask you that first. Well, I was looking at a global case and the numbers that I was presenting were for the US. Next year, the EIA will actually be publishing the International Energy Outlook again. That's one of the decisions I got made in the first few months there that I'm at the EIA. I don't know whether anybody noticed, but we also had a Brent oil price forecast and the short-term energy outlook, which came out yesterday. Let's say for the North American case, right? He puts out on there that you could come close to self-sufficiency or, in fact, beyond self-sufficiency for North America by 2020. And that's certainly not in any of the cases that the EIA has out there. Well, that's actually not right. If we take the low-demand case, combine that with a high supply case, you're down to US net imports of 3 million barrels a day. But if you combine most of that or more than that, it's already coming from Mexico and Canada. So that would actually imply on a total North America, Mexico, US, and Canada basis that you would be independent. One of the things I think that you should keep in mind is it was on that last slide that I showed a number of the different cases that EIA ran in the annual energy outlook. Not all of them lead to lower demand or higher production. I mean, there are possibilities with stronger economic growth, for example, that could lead to higher demand or problems on the production side that maybe the resource base just doesn't turn out to be as good as expected or that there are complications in terms of the costs associated with hydraulic fracturing. All of that could lead to lower production, which would then give you a situation where the US would still be importing, let's just say, five, six, or seven million barrels a day of oil in the period out beyond 2025. It's not impossible to conceive the circumstances. I'd say that in general, the direction that we're going is towards more optimism on higher production and lower demand. I had the same question. What are the big sources of the different outcomes as you see it? Well, one of the things that I should make it clear is that when we did this report, we did a report based on what could happen, all of the things being equal. And I think it's important to bear that in mind. But among the things we saw happening was with the resumption of drilling in the Gulf of Mexico and doubling of production there from the deep water based on pretty decent information coming from companies. So I'm pretty confident that if there's not another Macondo disaster, we're going to see a very robust growth, more robust growth than the IA has. When we looked at onshore production, we interestingly ran a lot of regressions based on efficiency improvements. And the surprising thing to us, which also gave us more robust numbers than the IA has. But surprisingly, we have understated the degree to which efficiency gains have been growing. We have a, I think, down more significantly robust view of Canadian production than the IA has. And that's partly based on new revisions from Canadian producers and the Canadian government. And we have an uptick actually in Alaskan production. So I think the major differences are found in the deep water and our judgments about efficiency improvements in tapping new technology into a very robust resource base. So what I hear is essentially it's a series of micro-analyses of different opportunities rather than different macro assumptions about the investment environment and so on. Let me ask something about timing, because Adam, when I said your scenario doesn't have a North American independence case by 2020, I picked 2020 on purpose. If I look at the charts you had up there, you got to that point by 2035. And Ed, you have it happening sometime between 2015 and 2020. So I think maybe I'll ask you first, Ed, you talked about the study you did of cycles a long time ago. What makes you confident that you can ramp up production at that pace without running into the sort of cost inflation and logistical constraints that might stop you in your tracks? There's actually some history that you can use on costs. If you take a one-year look at costs, you see much more inflation in the last year than you would if you take a three-year moving average of costs. If you take a three-year moving average of costs, basically upstream costs, the way we look at them have come down. I know some people who look at them see them going up. I don't like their methodology, and I'm happy to debate with the firms that do that, what their methodology is. But there are technological improvements that have been bringing costs down. I think that's sort of the most important point. Adam, you talked about how there are a lot of different cases and that there are downside cases as well, particularly if you have low global oil prices. Can you talk a bit about that? How big is that possibility? How big is the risk that Ed's case or even your reference case gets undermined by low global oil prices, whether because of Iraqi production or low global demand because of economic weakness? How do you think about that? Well, to a certain extent, I think you have to be a bit careful that the assumptions that you make about high production and don't come back and result in a lower price argument. If there is tremendous success on the production side, both in the OECD countries in North America and outside, as well as improvements in places like Iraq, Libya, and elsewhere in the OPEC countries, it's very possible. And technology improves, and as Ed is saying, costs come down. The net result could be lower oil prices rather than higher oil prices. That could ultimately prove to be a circular kind of argument. We've seen that happen before. It's not clear to the bulk of the analytic community that oil has to be $100 or $125 or $200 a barrel in the EIA's high oil price case to get the supplies needed to meet demand. And we have seen occasions where oil prices have come down pretty sharply. If I think the markets ultimately will set the price and we'll have to see how strong the oil rig count remains both in the US and globally if prices continue to move south. So success on the production front and technology front could lead to lower prices, which ultimately would reduce the incentive for production or further enhancements in technology. Let's take that thread a little bit further. I know when people talk about the potential for prices to come down, the typical response is that OPEC will modulate production in order to keep prices relatively high. The member countries have revenue needs and so on. And is there a point where there's so much volume coming from elsewhere that those countries have to make a choice between how much they sell and the price they gather? And that causes prices to come down and undermine North American production? Yeah, I mean, there's no doubt that a lot of what is unfolding has resulted from effectively an OPEC subsidy of drillers. And built into a model, at least for a short period of time, is the issue that you just raised, namely the fiscal requirements of commodity producing countries. And it's not, by the way, just Venezuela and Iran. It's also Russia, which has a higher break even number even than Saudi Arabia, which is much lower than those. So I think there are a whole bunch of trade-offs. Some of it are trade-offs that are already developing. So you don't have to wait for North American energy independence to see some of this unfolding. If you look at the rate of decline of imports into the US Gulf Coast, of oil from West Africa and Northwest Europe, Northwest Europe in part because of declining production, but West African crude had been selling at a premium to Brent. We are importing less and less crude from West Africa by sometime in 2013 on current trends. The Gulf Coast will import no crude from West Africa. And what used to be 2 and 1 half million barrels a day of imports will be more or less order of magnitude, 300,000 barrels a day all going to East Coast refineries. And this is already a challenge for Angola and Nigeria among the OPEC producers. By the time a few years roll by and there are a couple of pipelines that bring Canadian crude currently selling at $50 a barrel down to the US Gulf Coast, it would probably mean that the US needs to import no oil from Venezuela and no oil from Saudi Arabia, no oil from Iraq. And that also poses problems because the quality of that crude specifically is attractive in US Gulf Coast operating refineries. And there aren't many outlets other than the US Gulf Coast for that crude oil. So there will be a very specific pain inflicted on a particular oil export is even without energy independence and even without a flood of oil coming out of the new production. Adam, I don't want to misquote you. But if I remember correctly, you've been cited recently saying that depending on the development of North American oil production, you might, for logistical reasons, see attempts to export, perhaps to export light oil and import heavier in order to take advantage of the refining capacity that exists here. If political barriers make that impossible, how do you see that affecting the outlook and the potential for expansion of American and North American more broadly supplies? Right. Well, it's always, I think, a good thing for me to state that EIA tries to provide the best unbiased and nonpartisan energy research for its customers. And we don't do policy. Level of exports of energy products, including natural gas and oil, is a policy issue that is being worked on by appropriate policy making agencies. What EIA can do is, I think, try to bring some facts to it. I think Ed was already alluding to the fact that we may see, through Bach and crude oil production, for example, a tremendous and Eagle Ford in Texas, a huge surge in production of light-sweet crudes and condensates going into a refining system in the US that was designed to upgrade heavier, higher sulfur crudes, particularly in the Gulf Coast. What that suggests is, ultimately, it might make some sense to try to look at this from the standpoint of what would be best from the overall national interest of the US, what would help from the standpoint of growth in the economy, jobs, and so on while managing whatever the environmental issues are. I think that if you were to say, we continue to see an increase in domestic light-sweet crude oil production. And if you made that assumption and then further assumed that some kind of export policy was not going to be allowed, the net effect would be to drive prices down for those crudes. Lower prices for those crudes would mean that, potentially, that they would not be developed. You wouldn't have the rigs drilling. You wouldn't have people employed in doing it. And the benefits of that to the economy would be lost. So that would be the case. We have ways to go before we're going to be faced with that, but it's certainly worth policymakers considering. Would you reach a point where the price got pushed down enough that people invested in refining capacity suitable for that kind of oil? It's hard to see a great deal of investment in the US. I think more likely what you would see is, as is already occurring, shifts in the transportation system designed to move light-sweet crudes in places like North Dakota to the East Coast, where the refineries are set up to more of them are designed to handle lighter-sweet crudes. That's going to require changes in infrastructure. We're already seeing some crude moving by railroad. More of that will occur. There is talk of extending pipelines to move the crude in the direction of the refineries that could use it. Before I go to questions, Ed, I want to ask you one more thing. You've written that the one big potential barrier to the scenario that you lay out is opposition on environmental grounds. Can you talk a bit about that? How do you see that potentially unfolding? And what exactly do you mean by opposition on environmental grounds? The American public has been split on a whole bunch of oil issues for a century. And those splits of perceptions of the national interests have not gone away. And in many respects, they've gotten exacerbated over time. There are people who, for what they perceive to be legitimate reasons, don't like using dirty material or extending the usefulness of what are dirty things. As part of what we do in it, it comes in a couple of layers. There are people who don't like importing environmentally unsound, or what are perceived to be environmentally unsound, crude oil processed in environmentally unsound ways from Canada. There are people who are opposed to exports largely on the grounds that it perpetuates environmental damage or questions the integrity of the environment, physically at the plant of refineries or in the plants of uses of hydrocarbons that have waste products that are either on the land or in the air. So I think it's clear that we have a very robust set of environmental interests in this country who don't like extending the life of hydrocarbons. You talk about a variety of different sources. You're talking about offshore. You're talking about tight oil. You talk about Canadian oil science. Is all of that something that you put in the question mark category based on public environmental concerns? Or is some of it more uncertain than others? Well, I think there is uncertainty. And then we have not had a decent public debate on these issues. Either at the head of state level or on the hill, I think it's been fortunate for the development of this industry that so much of the resource base comes from private hands or private land or state lands rather than federal lands. And that's been good in terms of development. It has stifled the debate to some degree. On the other hand, it has enabled the growth of best practices on a state level and industry level. Specifically, if you look at fracking, there are issues related to the adequacy of aquifers or issues related to the integrity of aquifers. There are issues where different reasonable people have their minds rest in different places. I don't know whether I'm a reasonable person or not. What I am concerned with among these is not whether aquifers can have their integrity maintained through decent cementing practices. I think the above ground waste disposal is a particularly difficult issue. I think the annoyance of having truckers who, you know, let's face it, have a higher incidence of drug use and alcohol use than most other elements of the population is something that is of concern, should be of concern, and has an impact on waste disposal. Underground injection of hydrofracking fluids has been associated with unusual seismic activity in places like the Midlands in the United Kingdom or Youngstown, Ohio, or Bay at the Arkansas. And that also strikes me as a legitimate concern. I think it's fair to say that most of these concerns can be dealt with at a higher cost. And the question is, why does that higher cost? And how does the industry bear it? Well, I had a very interesting conversation a couple of weeks ago with the mayor of Youngstown, who is both pro-development and had his house significantly damaged by one of these earthquakes. Let's take a couple of questions from the audience. Please put your hand up, and I will point. I believe there's a gentleman with a microphone who will bring it to you. Over here along the aisle. So I was wondering if you could tell us how long it would take for the Brazilian pre-salt production to come online and what impact that will have. I'm happy to address the issue. Some of it is an obstacle that should not exist. Some of it is an obstacle that potentially should exist. In terms of the costs, one of the great changes of the last decade and a half has been the growth of a deep water drilling fleet, which numbered 17 in 2000 and now number is closer to 300, which is one of the reasons that I'm kind of bullish about deep water exploration. I think when it comes to elements of resource nationalism, the inevitable temptation to buy Brazilian material, the inevitable temptation to reduce competition between a state enterprise and international oil companies, has significantly slowed the progress of development as finally the new CEO of Petrobras has admitted in putting in place what might be a more reasonable projection. That more reasonable projection doesn't affect judgments about what the ultimate level of production will be, but rather the path of getting to that ultimate level of production. And very quickly, just to put this in context, compare the scale of the Brazilian potential to the other pieces that Steve laid out at the beginning, the various discoveries in Africa and the North American scene. How big a picture of this supply growth, how big a piece of this supply growth picture is Brazil? It's a big piece. So if you look at deep water production in the US when we hit 1.7 million barrels a day before the Macondo disaster, that was 30% of global production, a number that had gotten to that level of roughly 4.5 million barrels a day pretty quickly. Deep water had been growing at about a 10% rate per atom. And there was no reason to think that that was going to stop in the next decade. So the Brazilian piece of that, doubling from 2 million today to 4 million by 2018 and now by 2022 or whatever, the number is a significant number. We have time for one last quick question. Gentleman back there. Thank you, Bill Murray from Oil Daily. When we're talking about, by 2020, the possibility of having imports down to less than 3 million barrels a day and including NAFTA probably being net long, insane way from the policy, of course, does it make any sense whatsoever to start to consider the question about spare capacity in the US and what value that would be as a tool of what strategic value that would be? Is it too soon to? I think that's a great question for the next panel, where we'll talk about broader implications of this. Let me turn it into a question about the resource base. Are there parts of the resource base where the initial capital investment is low enough that you could imagine there being essentially standby capacity in the United States? Well, actually, there is now. If you look at the natural gas part of this business where there's no export release valve and there's no demand pickup, we have effectively spare capacity. And if you look even at the 9 BCF a day and at 65 BCF a day market where natural gas has displaced 100 million tons of coal in the last 18 months, you can think of that as a surplus capacity. But prices are going to go up. And when they go up, that resource base is like a just-in-time inventory of production capacity. Adam? One of the, Ed, bringing up the natural gas situation, I actually wanted to do the same thing. It kind of addresses two questions that were asked here. One is, can you conceive of a possibility that oil prices, at least in the US, or globally, could be forced down? Well, we have the example of what happened with natural gas prices. And if you were to extend that into the resource base, I think it's also really fair to say that even five years ago, and certainly 10 years ago, nobody had any idea of what the development of the gas resource base could be and would end up being in the US. And it's very possible that we might discover exactly the same thing about oil, that the resource base would support much higher production than current estimates. We are out of time on this panel. Thank you, Adam and Ed, for a fascinating discussion that I think has helped us understand what conditions might be required to see this age of abundance come to pass and what uncertainties there are as we look forward. We're going to move straight into the next panel where we will discuss the implications of all of this. You're on. You're leaving? Where are the geopolitical implications of that? The panelists now are going to assume that at the age of oil abundance, the panel now is going to presume the sound on here? All right. The panel now is going to presume that the age of oil independence does materialize. And look not at the energy implication, but the geopolitical implications of shoving all those millions of barrels of oil of surplus onto the global market. The moderator is Susan Glasser, who's the editor-in-chief of Foreign Policy Magazine. Thanks, Steve. Thanks to everyone. Can you hear me now? No. OK, how about this? OK, all right, here we go. We have a cast of thousands, as you can see. So luckily, the good news is no opening statements. No, I mean, this is really a terrific opportunity, I think, to have a conversation that all of us are looking forward to having, which is, what are we supposed to make of it? So let's not throw more numbers at everybody, I think, right now for the purposes of this discussion. Steve has given us strict marching orders, but let's take as a given the idea that this new age of relative North American oil and gas abundance is upon us. And let's start to really unpack what are the geopolitical implications of that. And obviously, it's speculation, but that's great. That's a Washington sport that we all excel at. So I think it makes for a pretty good conversation. It's such an all-star cast. I'm not going to slow us down with long introductions, but we do have Michael Levy, who you've already heard from, who is the director of the Council on Foreign Relations Program on Energy, Security, and Climate Change. Adam Saminsky, who you've also already heard from, who is the administrator of the US Energy Information Administration. Ed Morse, who is the managing director and global head of commodities research at Citigroup. Ed Chow, who is a senior fellow at the Energy. You're not Ed Chow. I'm sorry, Robin. I'm so sorry. Robin West, who is the chairman and CEO of PFC Energy. Ed Chow, who is a senior fellow at the Center for Strategic and International Studies. And John Hafmeister, who is the founder and CEO of Citizens for Affordable Energy, and of course, was the president of Shell Oil Company. So again, I can't think of a better and more distinguished group to sort of walk us through what some of the consequences are and where we agree and probably disagree about some of those consequences. So I'm actually going to jump right in here, and I'm going to ask Ed Morse, who said recently that this new age of abundance in North America beckons to make North America look like the new Middle East. So maybe you can start us off with what your tour of the geopolitical horizon looks like when all this oil and gas comes online. Yeah, I know you don't want any numbers, but I'm going to have to give some. And it starts with the fact that the US has a current account deficit of 3% of GDP, or oil import bill is 5% of GDP. You can paint a bunch of different pictures, but one of them that you can't avoid is if this happens, the current account deficit will no longer be a significant issue. And as Michael Mandelbaum has argued in various places, as have others, the current account deficit and protection of the dollar has been one of the big Achilles heel of American foreign policy. And we will be freed of the shackles of that if nothing else, looking to a world where the dollar would likely be maintained as a reserve currency for a long period of time. The other thing that comes as a consequence of not having the current account deficit impact judgments about foreign policy as we can have a better value-based foreign policy where no longer going to be cow-towing to despotic rulers or feudal monarchs whose oil supply lines are critically important to other aspects of foreign policy. And those trade-offs will be eliminated. I am not because I know others will get into other areas, but these strike me as two really obvious places where energy independence makes a big difference. Well, I definitely want to survey the group on whether they agree fully that we're no longer going to be cow-towing to dictators anymore. But quickly, Robin, you also have made some very interesting sort of sweeping sense of what this new age of energy independence could mean for us. I think you called it at one point the energy equivalent of the Berlin Wall coming down to talk about America becoming, perhaps, the world's top producer again. What did you mean by that? Well, what I meant was that this was that, as the Berlin Wall coming down, changed our perception of the world and our role in it, I think from an energy standpoint. I think it's very important that there are two things. To include Canada and the United States, you then have the US as self-sufficient. Energy independence is a dangerous term. Rex Tillerson said he didn't quite know what it meant, and I tend to agree. But if we're self-sufficient, several things happen. One, I agree entirely with what Ed's points are. One of the things also is there's tremendous change of crude flows. And the West African crude and Middle East crude, it's already moving more to Asia. It's going to move even more. And as a result, Asian countries are going to be much more focused and influential on those parts of the world. By the same token, I was asked by a senior diplomat from the Middle East last week, do you think that the American people will support 100,000 troops being sent to Kuwait 10 years from now to protect oil? I said, I don't think so. I think this is a tremendous challenge for the military. There's one other thing, though, and Ed sort of alluded to it, that I think is terribly important in all this, is that this was a tremendous private sector free market success in a period of stupendous market failures in other sectors. And this happened. The federal government had no role in this. 94%, 95% of the resources are on state and private land. The feds had nothing to do with it. It was a complete surprise to everybody. But it was driven by independent companies being very innovative responding to high prices. And people forget that there were brownouts in 2005, 2006. There were a million people on the Brooklyn Bridge from gas brownouts in the summer of, I think, it was 2005. It was a big crisis. Prices were high and the market worked. And I think if you look at so much energy policy, I think a lot of politicians feel that energy, as Clemenceau said, war is too important to be left to the generals. And I think that politicians believe that energy policy is too important to be left to the market. And I think markets work pretty well, and I think it demonstrates this. But there's one last point that I think people have overlooked in that is that part of the narrative of the United States going back to the 70s was that we were an energy glutton. And we were wasteful and spoiled. And the fact of the matter is, I mean, the president likes to say, well, we're 4% of the population. We consume 20% of the energy. But the fact of the matter is, the US economy is roughly 20% of the global economy. And we presume roughly 20% of the energy. That's about right. Population is a demographic, not an economic input. And the fact of the matter is that the whole narrative of the US in the world and its role in the world and, as I say, this sort of selfish energy glutton, that's going to change as well. I mean, I think this is, I do think this is on the scale of the Berlin Wall coming down. But I would also point out, there was a book written after that came down called The End of History, which was completely wrong. And I think that that we... Maybe it was just ahead of its time. Well, way ahead. But the fact of the matter is that a lot of thought is in a lot of places around the world are tremendous decline rates. The notion that there won't be tightness in oil markets globally, I think there will be tightness in markets. I think that certain technologies, renewable technologies, they may not work here because gas prices are so low, but they may work in a lot of other places. Anyway, I mean, I think we kiss. It isn't over. This is part of a continuing saga. There's just so much to unpack here. I do want to bring in John, because you talked about the role of private companies, and I think 2005 to 2008 was when you were sitting from a very interesting vantage point. How would it look if you were sitting there today, in terms of in your role as not only head of a company, but as a geopolitical czar of sorts? How has the landscape changed from when you were leading an oil company? My last advice to the board of directors of Royal Dutch Shell when I retired in 2008 was to steer capital away from the United States, because the United States was so confused on energy policy going forward that government had taken on, not just in the current administration, but prior administrations as well, the role of disabler rather than enabler. And as we move through the 50s, 60s, and 70s of the last century, government was the primary enabler of the great expansion of the economy that occurred in the post-World War II period with major legislative movement to make things happen for the American economy. And I think until the American government, the federal government in particular, comes to grips with whether it will be the enabler of prosperity or the disabler of markets, which it seems to have a much higher priority in disabling. I think if I'm heading an American oil company looking at use of capital in America, I would be very careful. I would be very selective. And I think that's really what we're seeing. There are so many American companies out there, however, that have huge capacity and the entrepreneurial spirit is alive and well that we are seeing what we are seeing. But trees don't grow to the sky. We learned that a long time ago. And so all the prospective growth in domestic energy supply could be achievable, but it also could not be achievable depending upon the kind of macro policies that we will set at a governmental level. Market only has so much strength. And yes, private landholders and state permits have enabled what we've achieved to date. But we could do so much more. We really could do so much more, not only in oil and natural gas production, but in substituting natural gas as a transportation fuel in the internal combustion engine by making methanol, let's say, from natural gas with flex fuel engines. And we could more rapidly displace oil imports if we chose to change some of the fuels we're using. At the same time, we open up more of the assets than the domestic assets that we have. But here's a limitation that we shouldn't forget. The oil and gas industry today has 100,000 job openings it can't fill. We don't have an immigration policy that works. 100,000 jobs going begging, which would otherwise accelerate even more activity in the oil and gas fields. An educational system that is not bringing forward the STEM educated students that are necessary to equip the companies with the numbers of graduates they're going to need going forward. So it's not just natural resources, it's human resources that matter as well. And I don't know a single, I spent Monday in West Texas, I spent Tuesday in Louisiana, and everyone I talk to, can't find machinists, can't find truck drivers, can't find people that'll pass the drug test, can't find skilled offshore workers, can't find engineers, can't, can't, can't, can't. This is a limitation that we ought to be worried about as a nation, and it's not just the oil and gas industry that can do something about it. There are other systems and institutions in the country that have to help this process. So I want to quickly take this actually outside the US for a second, and I want to ask Ed Chow, what about the rising countries and the demand from China and India, new players, Brazil obviously is a producer, Russia is a producer. How does the rise that we're presuming for the purposes of this conversation, how does it scramble what our assumptions are about the relative political weight of those countries if they're looking at the US in a different way? Does it change things, or are we being overly optimistic and thinking that it gives us a stronger hand? I think it changes things. I'm not sure it always change things the way we hope or expect them to be changed, but certainly in terms of energy investment around the world, I think in the time of plenty, which is what we're assuming, it would take the zero-sum game nature of the conversation out of the equation. We have this mixed feelings about Chinese energy investments around the world, and if there was not a concern over the lack of supply here in the United States, maybe that concern will dissipate. In fact, we have already seen this. We haven't noticed it, which is why, which is the interesting part. The amount of Chinese investments in North America, it has not raised the kind of concern that the Unicow purchased by Chevron did when Chinese oil company, CNOOK, was interested in Unicow. So we've already seen a more, much more relaxed attitude towards China's investment abroad, and India will be falling suit very soon. After all, they are the incremental demand centers of the world now, not the OECD countries, not America in this time of plenty. Their economy will continue to grow at two, three times our natural growth rate. So it takes away that element, which from a geopolitical standpoint, I think is healthy. It was never a very healthy phobia that we had to begin with. I know you told me in the hallway that I should try to disagree with someone. So I would do my best. I would do my best to probe the idea of whether we are really gonna be less concerned about Middle Eastern oil. And whether it is true or not that American people, at least American government, will no longer be sending troops to liberate Kuwait or anywhere else because we have become or will become more energy self-sufficient. Middle Eastern oil and gas is still important to the rest of the world. And our economies are intimately linked to the rest of the world. There is only one global power that can secure that supply today, right? They are wrongly. Are we therefore going to relinquish that role? Are we therefore going to cooperate with others? And I'm thinking again about China and India in terms of the global responsibility of making sure through oil and gas supply that the global economy is also healthy and not just our own domestic economy. I'm not so sure. I would like to probe that notion a little bit. Clearly, this is not gonna happen overnight. There will be a transition. Would that change the thinking on Washington's part of about a blue and water Indian Navy, a blue water Chinese Navy? This is a panel on geopolitics. I think this is the sort of thing that we haven't really thought about very much and needs to be discussed more in this town. Now, Michael, I definitely wanna bring you in here. I have to admit that many of my facts for this conversation have come from his terrific piece in the new issue of foreign policy magazine in which he urges us to think again about the American energy boom. And I think one, you also have brought, I think, a little bit of a note of questioning to the conversation about how much does a new moment of energy plenty translate into a moment of more political independence from the Middle East? That's certainly what everybody would like in the sense of sort of breathing a sigh of relief, but is that really just around the corner? It's striking in listening to the conversation how often words like feeling and attitude and variations on that theme come up. And it points to an important distinction between how this will affect our perceptions and how it will affect the underlying economic and physical dynamics of the oil market and its relationship with the global economy. I actually agree with Robin and Ed that this is likely to affect our perceptions in significant ways. If you look at the history of oil and international politics, one of the things that you find is that oil influences international politics because people think that oil influences international politics. And then they act based on those beliefs and those actions have real world consequences. So if you think that it matters, that Saudi Arabia is a big supplier of oil, you will do things because of that, regardless of what any economic advisor tells you about the fungibility of global oil markets. So actions are affected by perceptions, reality is affected by perceptions. That said, reality is also affected by reality. And as Ed has pointed out correctly, we live in a globally integrated oil market. It's not perfect, it's not the theoretical economic ideal that some people sometimes claim or more often assume exists, but we essentially do. And even if we are producing as much as we consume, this is the assumption for this panel, when something goes terribly wrong in the Middle East, the only way to insulate the United States from a price spike, which would be economically damaging, would be to bar exports, whether because we've not allowed construction of export capacity or because we have said by law, you're not allowed to export oil. Otherwise it'll be drawn to other parts of the world in order to equalize prices. Now that would be a big decision. Perhaps that's something that would happen, but I wouldn't want to assume that we're going to decide to break down this sort of open system for global trade and oil. Now, there are a whole lot of other geopolitical implications. If prices go down substantially, that changes the relative power of various countries in the world. I think Ed again pointed to this important piece on FDI. We talk about the geopolitical implications purely as a consumer, because that we're used to thinking as a consumer, that's been how we thought for 40 years or so. But if you think as a producer, you get into fights about export policy, trade policy, foreign direct investment policy, all of which has pretty big geopolitical implications as well. So Adam, I'm interested in your thoughts on this part of the conversation. I also wanted to step back and actually look at putting aside the US for a moment. These have been times of high oil prices internationally. What is your sense of what is the number at which it really begins to scramble some of the internal politics in a country like Russia, for example, which has built a lot of assumptions into its budget of continued high oil prices. Where does the price of oil start to affect potentially political stability in certain parts of the world? What's your feeling about that? Well, a number of analysts, both in government agencies and private sector companies, have analyzed budget break-even prices for a number of countries on oil if you were a large oil exporter. I think Ed already pointed out that a number of countries, Russia and Nigeria, for example, have very high budget break-even prices. A number of others have fairly low break-evens. If you just kind of consider that range, most of the numbers a year ago were falling in, the average was falling somewhere in the low 90s, let's say 92, up to $95 a barrel. Actually, because of higher prices and somewhat higher production in a number of these countries, that budget break-even has come down somewhat. It might be in the mid-80s now rather than the mid-90s. Kind of skipping over that for a second and going back to one of the major themes that have been brought up by virtually everybody here on the panel. I think one of the things that needs to be considered is what does this really mean for the US? And Ed hinted at it, that this is a huge potential positive productivity shock to the US economy, right? So that could grow GDP, grow employment, strengthen the dollar, shrink the trade deficit. All of these things, tremendously positive. One thing to keep in mind about this and to extend it out globally is that the US has managed to make more progress in this area, both in natural gas and oil, than virtually any other country around the world. And it will be interesting to see the extent to which developments in the US proceed into other countries. So far, other than Canada and maybe Australia, it hasn't really moved as rapidly as you might expect it to. Well, that's right. Ed, what about China, for example? Do we see prospects for them to experience a similar change in their internal energy picture? That's why Robin has to sit down. With two Eds. I think it's just beginning is my perception. There are a lot of other things going on in the domestic Chinese market, particularly with gas. There needs to be preconditions of a shale gas revolution, transferring into China, such as gas pricing reform, which they are starting to experiment with in a couple of provinces. It will also potentially change their relationship with Russia. In a time of plenty for gas around the world, Russia's need to diversify its markets become a little bit more urgent than at a time when Western Europe did not have availability of lower price LNG as a substitute for Russian gas. So it may make it easier for the Russians and Chinese to come together on a deal, something they've been working on for a long, long time, but never get there. So I think there are a number of implications for China, both in terms of domestic gas production potential, both in conventional gas, COVID methane, tight gas, in addition to shale gas, which will probably come last. We'll find that out in maybe five to 10 years, but not in the next couple of years. And China's role in the international gas market will also change when supply is plentiful. Okay, so Ed, how do you respond to the question of whether we're being, letting our sort of hearts lead us when it comes to the prospect of being more independent from the entanglements of the Middle East as a result of this? You know, I've not moved in a lot of ways. By that, I think there's much more consensus on this issue than otherwise might be the case. Clearly, the US has broad international interests. Clearly, Mike is right in talking about the role of oil. I'm just thinking about the role of oil in the Middle East since I've been looking at the subject of others in this room have been when the US was first interested in oil in the Middle East other than commercially developing it by companies in the least modern history. It was to make sure that Russia didn't get control over Middle East oil. And when the Cold War was over, inter-regional relationships became the driver rather than the Cold War. And they're bound to be other issues that will arise. As long as I'm speaking, I really do wanna make a point that others have made, and I think we've let go, Adam made it, and Robin has made it publicly many times in talking about the US having for as far into the future as one can think the lowest cost electricity in the world, the lowest cost natural gas in the world. And it's not just this issue of oil self-sufficiency that's driving what's happening. There is really an industrial investment boom that's unfolding, it's unfolding slower than it might. It looks likely to accelerate. There's a lot of evidence that it's accelerating. The lag has been some of the things that John has talked about. The lag has also been smart companies like the one he used to be at, saying, hey, we've got an opportunity to negotiate good tax terms with states that want our investment, want the employment. We're seeing a massive change in the petrochemical industry. It's not based on natural gas, it's not based on oil, it's based on the other thing being produced, NGLs. Lowest cost ethane producer in the world has incredible implications on petrochemicals. The steel industry has become really transformed. There's this symbiotic relationship between drilling and need for tubular steel, creating distribution networks and need for different kinds of tubular steel. And the US is seeing incredible flows inward investment into the steel industry. The manufacturing jobs that we think we can look at in a very conservative way are at order of magnitude between three and four million between now and 2020. So the implications geopolitically include what's happening in the US economy, and it's pretty profound. All right, I have two two-finger interventions and then I do want to go back to these bigger picture US questions because I agree that's sort of the heart of it. So both Michael and Edge have wanted to intervene quickly. Is that the picture that Ed painted of what we worried about when we first started to worry about this aside from as a commercial interest is really important because it takes us to a time in our history where we did not have as free and open of a global trading system. So preferential arrangements for oil trade and preferential tariff systems and all these things made geography matter a lot more than it does today. Where we had a world superpower rival, Soviet Union that we worried would invade and control large pieces of production and therefore be able to reduce supplies. And we're not in that world right now, but we could be in that world in a couple of decades. It's very difficult to predict how the future will unfold. And one important thing to keep in mind when we talk about all of this supply picture is that its impact on the world on a sort of linear course without many changes from where we are today is very different from what the impact might be if we end up in a world that is very different when it comes to global trade, when it comes to global security. If we end up in that world in 20 years, then the fact that we have more abundant supplies depending on what we've extracted between now and then will have potentially different implications. Okay, Ed. I learned many years ago not to disagree with Ed. And I'll only do it when it's necessary. And I certainly don't disagree with him at all on the positive aspects, profound positive aspects of on the domestic economy of this natural gas and an oil production boom in North America. I was trying to make a different point. And that point is that that self-sufficiency if we were to achieve it does not insulate us from the global economy. As we are finding out today based on what's happening in Europe right now. And so perhaps supply from the Middle East is not so critical for us anymore. But where does that leave the global economy and who's gonna secure the supply lines from the Middle East? We have this kind of mixed feelings about when the Chinese in particular start doing too much to protect their own interests. We feel threatened when they do that. When they don't do enough we call them a free rider, right? So somewhere between the two we gotta figure out what the mix of cooperation, collaboration as we are doing say with the Somali pirate problem with the Chinese and others right now of how to share that global responsibility even if that Middle East supply is no longer so critical to our own economy. I would note that this has been a record year for Somali piracy so far. So cooperation in and of itself might not necessarily be the key to solving problems. So I wanna go back and I wanna ask Robin and John to start us off in a conversation now about what are the US political implications of this both in the short term, this is an election year and we're already seeing actually both campaigns in some way talking a lot more about energy than you might have expected a couple years ago. But I'm really curious for both of your takes both in does energy and this energy boom play into the 2012 presidential campaign and then in a more long-term sense do you see it being associated with one party or the other? I find it fascinating that one word has not been mentioned once on this panel today, carbon. And the president has said that climate slash carbon is one of his priorities in the next administration. And I think that frankly, if Waxman Markey was the basis of that was really their philosophical legislative statement. This was kind of a Eurogreen approach. It was a big transfer of wealth. It's created a new market. It was to use government regulation to drive in new technologies. And I don't think there's much support for that in the country. It's very interesting, last week ago Friday was the hottest June day ever recorded and increasingly on the weather on the news and the weather is talking about isn't it awfully hot and it seems to be hot all the time. There's something going on. And so I think that the issue of climate is an interesting issue. I think that Governor Romney is going to come out for a much more pro-market shifting power to the states, opening up public lands. One of the key issues is with EPA. That's really where the power lies in this whole issue. And the other thing is that you have states like Pennsylvania and Ohio and there are a whole bunch of new oil producing states, oil and gas producing states. And so the political calculus is going to change domestically. But I think that in the end, one of the president's regular taglines is he really doesn't like the oil industry. I think that's fair to say. And he wants to tax it more and it's a target. And I think there's a real danger what some congressmen and others have said. One of the real dangers and Ed alluded to this is that what could screw this whole thing up is infrastructure and the lack of infrastructure. And if there's, whether it's using a regulation or not changing legislation, I think that there is a chance that this thing could be stymied and it could come from Washington, although it was initiated by the market. John, do you agree that this potentially cuts against Obama even though in many ways this has happened on his watch, whether he's had anything to do with it or not is a different question. I think the politics of energy are hugely important in the national dialogue, in the corporate dialogue, and it will be a major discussion factor, I think, as the campaign carries on. And there are many, many points of view with respect to the politics of energy in which everyone can be right and everyone can also be wrong. What do I mean by that? Well, let's be clear. Energy and the development of energy, and I'm talking all kinds of energy, not just oil and gas, could be the basis, as was suggested, of a whole new era of prosperity changing the whole economy, changing the revenue flow to the government, changing the deficit position of communities and states and the federal deficit itself, if we could unleash all of that prosperity. At the same time, we choke on our waste and I think we could actually turn waste management into part of the prosperity as well. I think the president is wearing thin when the whole discussion is around carbon, when it really should be around waste because it's water, it's land, and it's air. Carbon only implies air, but there's a whole waste management industry that could grow with the increased prosperity in the production of natural resources at the same time. I think the both and, whoever can get the both and story right to the voters, I think will be more successful. This either or business just doesn't work. We've had miserable experiences the last three years with gasoline prices in the first and second quarter, leading to near recession in the third quarter, the last three years, stock market volatility. People are tired of the uncertainties of low growth, slow growth, no growth. And what people are looking for is a way for the economy to rebound and sustain that rebound and to experience real growth. I think the opportunity is there. I think either party could grab it and run with it and I maintain a nonpartisan position and whomever I talk to, but the reality is this country can be poised for such incredible growth for not just for a few years, but for decades if we unleash it and let it happen. And I include waste management as an industry that's part and parcel of how we grow going forward. Adam, do you see other ways in which this can rescramble the US economy? I mean, you know, in this positive way or perhaps in not so positive a way. Are we gonna become a new, we're gonna become an energy state, we're gonna become a trapped in the resource curse? Well, you know, in many ways, this question of energy independence, wherever it takes you once you get there, we already are a net exporter of a coal, we don't really import a lot of electricity, EIA forecast that will be a net exporter of natural gas by 2020 and we've had a very thorough discussion of the potential on the oil side. As the only federal employee on this panel. See, I didn't ask you whether you saw President Obama would benefit from this. I would say that the role of the federal government has not been, I don't think, has been as negative as some have characterized it. Natural gas and oil hydraulic fracturing, a lot of the 3D seismic technology used in this got its start in the federal labs. The independents who were responsible for the breakthroughs and natural gas fracturing were helped tremendously by a federal subsidy on natural gas production. It was a dollar a million BTUs at a time when natural gas prices were very low and it was hugely significant. You might even look at that as being one of the better federal policies. It was a subsidy that was put on when it was needed and was taken off when it wasn't needed anymore. There are a number of things that are going on in terms of the federal government now. President was out in Oklahoma just a few months ago encouraging the federal agencies across the board to speed up their permitting processes for infrastructure developments. And a lot of things are happening, I think, that are much more positive than what you often see in the press. So my feeling is that the economics ultimately are gonna drive this and the economics are positive. That many of the things that we are seeing in the energy area will have very strong implications for economic growth and that the environmental issues that John has brought up and others can be managed and managing those will often require state and federal regulations, but getting those regulations right, I think will actually help encourage development, not discourage it. So Robin challenged us to bring up a subject that we haven't talked about much, which is global warming and how this might scramble both the US politics of it, but also the international politics of it. Michael, I know that's even a part of your job description, so walk us through your scenarios here. Sure, let me briefly, I think, elaborate on what Adam said, because it's important to be clear about what the president has done and what his strategy is. Yes, there has been an effort to go after some relatively small tax breaks, tax treatment, whatever you want to call them for the industry. We're talking about something that adds up to about $4 billion a year in an industry that is far larger than that. And there's a legitimate debate about the impact of the individual provisions, but let's not blow that out of proportion. On the carbon front, it's also important to be clear that good carbon policy is perfectly consistent with the sort of oil and gas development we're talking about. If I recall correctly in the latest annual energy outlook, there are a couple of special cases, one with a $15 a ton carbon price, one with a $25 a ton carbon price, that sort of brackets the possibilities of what we might have got under Waxman Markey. My recollection is that oil production increases in both of those modeling exercises because the CO2 price creates an incentive to capture carbon dioxide, which can then be used to enhance oil recovery. Now projections are not gospel, but that's a real possibility. That's actually the one big growth potential in US production that we haven't talked about because there isn't a carbon price to create an incentive to make that supply of CO2 available. If you look at the basic economics of the issue, increased US oil production is unlikely to have a large impact on global emissions, and increased natural gas production, particularly in the next decade or two, is likely to displace coal and therefore reduce emissions. The bigger potential impact on climate policy I think comes through politics. To some good extent, the discussion about climate policy to date has conflated several different challenges, one of which was greenhouse gas emissions and global warming, but another was this idea of resource scarcity that we're running out and therefore need to go in a different direction. If that piece of the coalition that wants climate policy in place vanishes because of this sense of abundance, then I think it becomes more difficult to put good climate policy in place. Now you can argue the other way, every time you run the cost estimates of a model for a cap on greenhouse gas emissions, those estimates come in lower if you have more abundant natural gas because it makes it cheaper to meet your targets. So you could imagine this helping in some ways, but it certainly scrambles things. There's no question about that. I'll just make one more observation because you asked about the international politics of this. For the most part, people in the United States who care about climate change think that natural gas is good news. There's a vocal community that thinks it's very bad news in part based on some flawed studies on the leakage of methane and in part based on a basic belief about infrastructure trends and how we have to pick one direction or another. That is not the view in Europe. In Europe, natural gas is generally seen as a bad thing for climate change and a bad direction when it comes to climate change. And the international level, that will take us into some problems. When we go to an international meeting and say, look, we've reduced our emissions and we're displacing coal with natural gas, they'll say natural gas, that's not a positive story on climate change, that's a negative story. That's going to cause some friction. I think that's an important point. Does anyone else want to weigh in on the sort of where the climate discussion goes as a result of this? Well, one point I'd make is that I think Waxman-Markey, which was over a thousand pages long, mentioned natural gas twice. But the impact on the economy and the energy system doesn't depend on how many words are devoted to a resource and a bill. It's what it does to the economics. My only point is that what happened really, there was a big program and a lot of political capital was invested in it and something entirely different happened. Ed, Chao, and then John. Well, certainly internationally, in a world of plenty, particularly on gas, then for India and China in particular, you've got the trade-off of using domestic coal, which is very dirty, and which harms the environment, the air, people breathe, and as income grow, the population will become more and more concerned about these matters, and if there's availability of gas, whether that's domestic gas because of Chao gas revolution in India and China or imported gas, you now have a substitute that may be readily available that was not part of the equation at one time, but will become increasingly important. And once again, that's where the energy growth and therefore carbon emissions growth is coming from in the world, and that will definitely bend the curve for them. John, I know you wanted to jump in. I think Europe's voice in the world, I think, can be loud and demanding, but Europe's overall impact on the world, I think, is not all that great when you see the world's largest economy and the world's second largest economy pretty much choosing the path that they will choose. But let me say this about the oil and gas industry. There is a very strong, and I would almost call it a passion, to do things right, because when the industry gets it wrong, we see Meccando, and we see the disasters that occur. And so when it comes to regulations, the oil and gas industry is looking for clarity and continuity, because clarity and continuity, you can manage. You can engineer toward it. You can make things happen with cement or with casing or with other innovations in technology to actually control leaks or to stop them all together. And so I think clarity is important. When that clarity becomes politicized, and it's this program this year, another program another year, a new regulation this year, a new regulation's bending, that becomes very frustrating, and that's when the industry kind of pushes back. But I think if there is a tendency towards best practice and a tendency toward regulation using best practice, I think you get a lot of industry cooperation, which has positive impacts on the environment. Robin? One point I'd like to come back to, which Ed showed a little too, is there's a lot of shale elsewhere in the world, in China, in India, in Argentina, people thought in Poland and everything like this. But we estimate it takes about 1500, wells to prove up a play. And with the exception of Canada, there's no place in the world where they've drilled more than 100 wells. And what happened in the United States, it was a good, perfect storm in the sense that we had a huge service sector. We had transparent gas markets. We had the ability of independence to get financing. High prices were driving it. There was a gas market. There was a gathering, gas transmission. Everything was in place for this to happen if these guys could figure it out. If you go to places like China, and we've done work with the NDRC and other groups, their fiscal system is all wrong. They don't have a, it's gonna take these other places a long, long time. And the point I would make is also, I said the opening, I think that frankly some renewables may have much more application in those places than they do in the United States, and I think it should be encouraged. Okay, so we've had a very patient audience here, and I do wanna give you a chance to jump in with your questions too. We have a lot of folks, so if you can keep your questions to be really a question, and give us your name and where you're from, that would be terrific. Ma'am, we'll go ahead and start off with you. Stephanie Kinney. Stephanie Kinney, Maxwell School. What you are positing today is important, but it is not very well known or understood. What kinds of actions do you see as important in the next year or so to get the public more broadly educated, and in particular university students? I have students coming out with tremendous debt who think they want to be NGOs, which will pay them nothing and they won't get their debts paid. Energy is not something they think of. They take my sustainability and public policy course, and yet the one area where you could both combine earning a living, a real job, and doing something worthwhile if you have the sustainability frame would seem to be energy. What suggestions do you have to attract the students coming out now into the areas that you need? John, this seems to go to your point. This is a critical factor as a public matter of national well-being. The lack of information that permeates our society on all matters relating to energy and the environment is a very serious problem. And as I used to say in API meetings, American Petroleum Institute meetings, if you don't have the public on your side, then the public is against you. And the way to get the public on your side is information. And I founded Citizens For Affordable Energy for specifically that reason and spent seven days a week trying to engage people at all social and economic levels across the country just to get information out, my website, CitizensForApportableEnergy.org. And it is basic, simple information about what it is, what's possible, what's not, what's important. We can't count on media because media have a different job to do which is about exposing, not educating. There is, I think, an outcome of some form of education and so I welcome media all the time and embrace media as an outlet but it is not media's job to educate the public on energy. Our school systems badly lack any approach to energy. It's not taught. Oklahoma is the only state in the nation that is part of a state curriculum mandates energy education at all levels of the school system. And so we have this huge undertaking that has to happen for any of the success that we potentially have in front of us to actually occur. And so I think it is not helpful when politicians vilify the very source of economic value creation that comes from all sources of energy. And whether it's right wing politicians, bad mouthing renewable energy or left wing politicians, bad mouthing hydrocarbon energy, it's simply not helpful. I know why they do it. Everyone knows why they do it but it doesn't do any good other than for their own electoral results perhaps. But I think we have to undertake this as parents, as leaders in society, as teachers of those who are coming after us. And we owe it to our citizens to do that on a sustained basis. Adam, I know you wanted to jump into. Right, well, I do come from the Energy Information Administration. And I just had to say that EIA has been trying very hard to help in this area, John. If you do a internet search, use a search engine and type in energy information. We come up first. There's, interestingly to me, because I did this the other day, the third hit that you get in Google or Bing if you type in energy information is the EIA Kids page. It's very, very popular. It's got a lot of really good basic information on where energy comes from, how it's transformed, how it's used. And it's, I think, extremely popular. And I hope that that kind of thing filters down. The EIA website has been redesigned. It gets hundreds of thousands of hits daily. And it's a very, very, I think, useful tool, not just for kids, but for everybody in the analytical community and in the policy community that's looking for answers to some of these basic questions. All right, I want to get to some more questions here. Sir, can you wait for the microphone? Because I think we're intrigued. Bendirian Department of Energy, kind of a two-part question. Mr. West, your firm puts out, I think it's, I don't know the exact title, but the top 50 every year at the energy companies. I wondered first how this might shake up that list in a sense that much of the revolution the development we're talking about is in the Western Hemisphere. What does this mean for previous national champions like Total, BP, others, given that a lot of this is going on in the US and otherwise a lot of the traditional natural gas and oil plays are still under state control in countries like Saudi Arabia and others. And secondly then, going back to the geopolitical implications of this, and this is maybe for the broader panel, we've talked about, Mr. Chow mentioned the shared global responsibility, but we talked about the US versus our engagement with India and China. What about our end or the golf producers, our security agreements with them? What about our traditional consuming country allies, South Korea, Japan, Europe? What does it mean for them if the US is potentially more secure? Good question. Okay, in terms of the industry, what's happening in North America isn't gonna change the list very much of the top 50 companies. One of the interesting things is that it's important to understand that the North American unconventional plays tend to be, it's a different process, you drill thousands of wells. What big companies with the Exxons and Chevrons and totals of the world do, they develop enormous capital intensive engineering intensive projects, big offshore projects shell, big offshore projects in the Gulf of Mexico or West Africa or the Tarsans Project in Canada. And that's their business. This North American business, you see who's done it, it's largely the independents. Some of the majors are looking at this and wondering if they can come into this. It's clearly a big resource play, but basically independents run their business for production growth. The majors run their business for returns. And it's really, it's a different model and it's a real challenge to them. Although the majors are trying to figure out how to come into this. Ed, do you wanna touch on the second part of the question? I guess my feeling is that it doesn't change things as much as people would like to, or maybe as quickly as we would like to. Susan pointed out rightly that the Somali piracy problem hasn't been solved. But just think of what it would be like if we didn't share that responsibility. This is the beginning of our experiment. We haven't done this sort of thing very much before. And it'd be interesting to see how that goes. It is a shared responsibility with our traditional allies as well. But at a time of plenty, it allows you to think more about the shared protection of the global commons with people we were once concerned about as their power inevitably, I would submit, increases in places like India and China. But the traditional allied relationship will be in place and I assume that they will continue to want us to play a fair share of that. How do you define that fair share? I think it's the interesting question. Pick up on this one quickly. I think there's a bigger impact on the gas side than the oil side for a lot of the traditional allies. I think on the oil side, the biggest immediate benefit would be somewhat lower oil prices, which would accrue to everyone, not just to the United States. The biggest potential downside is that the US misreads the situation and scales back its investment in security around the world, which will affect everyone. But on natural gas, we're already seeing consequences. The fact that the United States is not buying gas, LNG from the Middle East has freed up supplies and put Europe in a much stronger position with respect to Russia. And that's shaking up the geopolitics of gas in Asia. We, sorry, in Europe. We could see changes in Asia as well. We're obviously having a conversation in this country about potential natural gas exports. I don't see them by themselves being revolutionary, but they're an important piece of the puzzle that gives consumers, particularly Korea and Japan, more leverage in dealing with producers and potentially take some of the politics out of natural gas trade. That's a good thing for US allies and a good thing for the United States. Okay, we've had a patient gentleman here in the front, and I'm gonna try to get to as many of you as we can. Robert Schroeder, President of International Investor. You'll forgive me, but from what I've heard so far, I think you guys missed the biggest story here, and that is that instead of the one single world price market for petroleum and other energy commodities, we are starting to see a divergence between what I call Western hemispheric pricing and the Brent price, for example. We saw as much as a 20% divergence between Brent per barrel oil prices at one point this year, and that spread seems to be continuing. We believe, at least from our analysis and talking to a lot of experts, that we're going to, this is something big that's happening here in terms of an independence, and it's going to put us in a position where suddenly, let me bring this to a question for you. Suddenly we're going to see a world in which not only is the United States capable of operating on its own, the pricing mechanism will be different for our hemisphere than the rest of the world. We will be less concerned with what happens in terms of crises overseas. The real question becomes, with the pressure on the federal deficits, do people start turning and say, we should price or at least tax the barrels that go into our domestic economy differently than those that are exported abroad. We've seen other nations do this, Norway, Russian Federation, and they actually bring in a lot of tax revenue by putting heavier, larger taxes on the energy that is consumed outside of their country. Do you see the possibilities of this? That's a word we haven't heard till now. Well, it violated the Constitution of the United States to place an export tax on it, anything. I mean, that's just as a basic rule which is being reaffirmed repeatedly by the Supreme Court. So that makes it less likely. I'm going to agree. Well, I think I disagree with the premise fundamentally. It is true that the differential between Brent and WTI has reversed itself and that is for a lot of technical reasons that we probably shouldn't get into on this panel, but they still track each other. It's not like consistently Brent rises and WTI falls. It is true the differential have flipped, but that doesn't mean that the world pricing relationships in terms of a global market has changed at all. The more Norwegians were not insulated from the effects of Rita Katrina. Their oil prices went up at the same time, even though it had nothing to do with them, even though their net exporter, their prices still went up. So I don't agree with the premise of the question. Okay. Sir. Oh, well. Do you mean me or something? It's okay. You go ahead and then we'll get the other gentleman. Sorry. It's okay. I don't mean to carry over a group. We basically had a long discussion about, I'll call it a supply shock, abundance, new sources. How about demand shock? In your forecasting or China demand is forecasted to grow, but a lot of people are discussing China may experience much faster oil consumption growth if their car industry, they assume driving patterns similar to the United States and all that stuff. So I'll just be interested in your opinion around that issue. Okay. Yeah, you know, if there's a little bit of controversy over what we think we know about supply, there's significantly more controversy about what we think we know about demand. I think there are a couple of issues that you raise that are really important. One is, what is the share of world GDP that goes into energy costs? When Brent prices were moving toward $130, a barrel not so long ago, three months ago, the percentage of global GDP going into energy was at its record level. It was the same level that it was at in the latter part of the 1970s. You had to do a lot of arithmetic to get there, but I'm pretty sure that that was the case, which may be one reason why there is really a cap on prices because the impact on the global economy at a certain level is really very high. The other observation I would make, and this goes to issues about what we think about China in particular, let alone India, is that demand doesn't slow down. It comes to a tipping point. And in the history of European Union of the original EEC-6 or of Japan in 1973, 74, or of Korea through the late 1990s or Malaysia and Taiwan, is that they had incredible growth. There was double digit growth basically in all of these cases, and then a wall was hit all of a sudden, and that level of patrolling product demand has never been exceeded. Japan's record year of product demand was 1974. The six countries of the original EEC, their record year of patrolling product demand was 1974. Yeah, double digit acceleration. China's not had double digit acceleration. It has on power generation requirements. If you look at China and there's a lot of controversy about the data, there's a lot of controversy about what might be going on, but two years ago, June or July, the annualized growth of demand for power gen in China was 20%, a year ago was 10%, today it's two to 3%. Patrolling product demand in China this year has grown less than 1%. You're on year, there's something going on and it may be that the structure of the economy is changing and it may be that the big period of time of focusing on infrastructure, commodity intensive infrastructure has come to an end, or it may be that the economy is really in a slump. Time will tell, but to the degree we know about demand, it's that it can come to a tipping point. So I promise that we would end right on time, so I'm gonna actually disclose this with a quick lightning round to all of our panels, because I think this has been a terrific conversation and I know there's so much more we could get at. I'd like to ask everybody for a winner and a loser from the premise of our question, which is that this American energy boom has happened, in particular one that we haven't talked about yet so far. And Michael, because you just looked at me, you're first. That we haven't talked about yet? Or you can resurface. We've talked about every country in the world as far as I can tell. Winner, the United States. Loser? Thank you for the suggestion, Russia. The audience is gonna get to vote on this afterwards, so Adam. I think that the winner is the average American wage earner. I think wages go up when we develop more, and if we can manage the environmental issues, which I believe we can. Everybody wins here. As far as losers are concerned, I don't really see it that way. I mean, I think that positive development here doesn't mean that anybody has to lose, whether here or overseas. What about those dictators in the Middle East? Ed. Yeah, I'd like to believe in one globalized world in which everyone shares in a growing pie. But the fact is there are winners and losers and the audience and Michael picked on the obvious winners and losers being the U.S. and Russia, and not simply because what's happening is related to oil and gas exports, but Russia's a big commodity dependent country, and it looks like what's happening in oil and gas is happening across commodity land. But I think single crop countries that are in the commodity business really are in a zero sum world when it comes to this business, and that makes for a significant amount of political turmoil. It's not a geopolitically positive issue, and I would note that as I think through the market consequences of what's unfolding just on the oil market with ripple effects on the gas market, this is gonna be a significantly more volatile price environment rather than a less volatile price environment, and the winners and losers of that are the same, a fewer commodity producer in a really volatile price environment in which you're struggling to keep market share and revenue, it's not a pretty picture. Robin? I would take it a little differently. I think the United States, the winner and all that kind of thing. I think a potential big loser on this, frankly, is the environmental movement and green concerns, and I think that that could be a big mistake, and I come back to my point earlier that this is not the end of history. This is not a static situation, and both technology and politics will continue to drive a lot of changes, and it ain't over, and I would urge people to keep pushing ahead. Winner, I would say consumers around the world, not just in the United States, at a time of where you could have lower energy prices and a different set of energy choices depending on how you value the environment, climate change and so on, you have a different menu of options than you maybe previously thought you had. Hugo Chavez, just the name, someone who hasn't been called upon yet as a loser, out of this, and I agree with Ed, obviously, whenever I can, but it's absolutely the prudent thing to do. But for those same single commodity economies, it could also become a winning situation for them in the long run in the sense that high, very high energy prices have enabled an awful lot of bad economic policies in those countries and a lower price of oil in particular, maybe allow room for different kind of economic thinking and reform that's very necessary for those countries. But so maybe in the long run, there are winners too. John. The winner, I think, will be North Americans. If we get this right from a government policy standpoint, I think North Americans broadly will win the most, and I think we will start a multi-decade new generation of prosperity in this part of the world. The big loser, I think, will be OPEC with the exception of Saudi Arabia, which I think has actually more enlightened global thinking than any of the other OPEC nations. They'll find their way, but I think OPEC will descend into chaos as an organization and they don't know now how much they're hated by the entire world, but they will find out as things unfold. Well, thank you so much. I'm not sure it's an upbeat note to end on, but certainly a provocative one. What a terrific discussion, and thank you to the New America Foundation and Steve for hosting us and to all of you for coming today. Thank you.