 So now let's segue to our next panel discussion, Annie and Paul, if you want to take your places. Annie Lowry, as all of you who were here earlier in the morning know, is the business and economics writer for Slate Magazine, soon to be joining the New York Times and having a very busy week for many other reasons as well. But Annie, I'll just hand it off to you again without embarrassing you further. So yeah, in this segment we're going to talk about a view of the energy industry from the view of Wall Street. And so I'm here with Paul Sinkie, who is an analyst for Deutsche Bank. And so I'm going to do a little bit of a no-no for panels and start off with a little bit of an exposition about some of the things that Deutsche Bank has been analyzing recently. And so recently they've been telling, and please interrupt me if I get this horrifically wrong, but they've been telling the folks who pay them for their good wisdom that they see peak oil happening a little bit sooner than some other folks do in the next sort of 10 years and that what might happen is that underinvestment is going to lead to a supply crunch. That supply crunch is going to speed up the process in which electric vehicles become much more common. Electric vehicles will be disruptive and this will lead to supply and demand trailing off in tandem somewhat sooner than other folks see it happening. So is that basically the shape? We don't talk about peak oil from a supply point of view, from a geology point of view. We talk about it from a geopolitical point of view. So the problem is that conventional oil is essentially concentrating into the hands of lunatics and other, you know, difficult to deal with people who essentially view investment in oil as something that's done by other people for their benefit to take rent out of the oil industry to either spend on Ferraris or, you know, in the case of a Chavez spent on social programs or, you know, roads or schools, whatever they spend it on, they don't tend to view it as a re-investment process and that's how the underinvestment starts. So in certain places there is the opposite to peak oil going on. Obviously in the U.S. where you have an open so far investment climate, high oil prices have generated a new resurgence in supply, as you will know, and that, you know, there's room for hope there. But the reality is that the majority of the world's remaining oil is now in the hands of, essentially, of OPEC, Islamic or Socialist governments. So the top, or 80% of the world's remaining conventional oil, you know, is now in the top 10 reserves holders are all either OPEC, Islamic or Socialist and that means that that whole underinvestment theme is very important and that's where we see the peak on the supply side. And so talk to me a little bit about the demand side as well because you see a transition to electric vehicles happening much faster than we actually had a panel earlier this morning about cars in which we had some folks from the auto industry saying that they think that this will happen slowly. In 2020 we're probably all going to be in the same type of cars that we're in now if there are some changes to fuel economy. But you see it happening faster and you use actually the word disruptive or maybe that's just going to be a blighter. Well, disruptive comes from the idea that once you drive a more efficient car you're not going to go back to a less efficient car. You know, it's kind of digital camera type example. A film has got cheap and developing film has got very cheap but nobody goes back because it's just a better product basically. That's the disruptive. There's also the asymmetric elasticity which you found in the 70s with oil which is where the price gets very high. You substitute the oil out of power generation and out of industry that's relatively easy to do even though oil prices then go very low you never put it back in. So you're looking for it to be substituted and worked out. The problem is the asymmetric elasticity means that you also get harder and harder to substitute over time. So you're now going off to one of the single most difficult things to substitute which is gasoline. Cheap, relatively cheap gasoline in relatively cheap cars and that's somewhat tough. The overall view is that the average U.S. citizen regardless of whether he's grabbing himself as an environmentalist or not uses 20 barrels of oil per head per year. So that's the average in the U.S. Europe uses 10, China uses 2. The Middle East uses 10 which is crucial. OPEC uses 10. So there's pressure on the oil supply from the demand side in these countries as well and obviously you can see that the potential for efficiency gains in the U.S. is enormous. It's also the last major market or the major market where the price is low tax and relatively free market because you've got these governments interfering in places like China and in the Middle East Europe the gasoline price is 10 bucks a gallon. It's not much very far to go there and it's only half the oil per capita. We firmly believe then that as the pressure from China in the Middle East continues as the supply side fails to react because of what I said to you about who's got the remaining oil. So what you do is you drive the price of oil to the point at which Americans change their behavior. Because again and again Americans have elected to purchase heavier cars, to purchase bigger cars, to purchase less fuel. And I know that we've seen this change a little bit recently but for a long time it was that you would predict that people would have smaller cars in fact they keep on buying bigger and bigger ones. And so do you think that what will happen is essentially the price of oil will get so much that it will really change the auto consumers behavior? Totally. I don't think there's anything stupid or egregious about people driving very big luxurious cars. It's simply a function of very cheap gasoline. So you've had gasoline in the U.S. at a dollar a gallon for as long as we did and then just about $2 a gallon especially relative to income. This wasn't a big deal. It was the last of your concerns was the price of gasoline. And if we had allowed frankly Exxon to continue investing in places like Venezuela and Saudi where it used to be what you'd find is that we'd have loads of oil and it would be priced at like $20 or $30 a barrel. But in the event as I said as governments have taken over they've screwed it all up. And by the way this is a huge issue for us as we view alternative energy going forward because it's essentially dependent at this stage on governments. And governments as you probably have guessed from a guy coming from Wall Street are basically now our big problem in terms of very high indebtedness and in terms of their competence to deal with the issues that we face. We're really questioning that quite frankly which is why all your alternative energy stocks have been so hard hit recently on the stock market. We've just lost all confidence in future subsidy of any kind. Anyway going back to what we were saying about choice of car and efficiency what you're doing is almost exactly bouncing the price of oil up at the point where U.S. assistance changed their behavior which is around at this stage $4 a gallon which equates to around $120 a barrel of Brent oil and that's exactly where you're bouncing. So you're bouncing at the point where there's behavior change. The issue is that it takes the cars are available if you want to buy one it does cost a lot more. The economics just about begin to work at four certainly at $5 a gallon the average driver would choose a Prius as a car that would economically make sense. That's a 12,000 mile a year driver. A 100,000 mile a year driver like a taxi driver should would have already I think my cab here was not a hybrid but every cab in New York City is now hybrid by actually by Bloomberg's mandate but they should all be driving hybrids. The issue is it takes 12 years to rotate the fleet for the average driver so we're at the peak point but we're at a kind of a decayed long peak point from which we think U.S. gasoline demand is actually going to collapse. And so talk to me a little bit about emerging economies in Asia and obviously they're going to be a bigger part of the demand story and they're going to be a bigger part of the consumer story going forward. So how do you see your Chinese citizen who all of a sudden is capable of purchasing a car 10 years from now and the tens of millions who will what's affecting their consumer behavior? Well the interesting I guess number there is that typically there's been a relationship of about $5,000 per year of per capita income and car ownership. You actually have a direct take off when people get to $5,000 per year if we look back keeping in mind that with developing economies you can look at the U.S. in the 1800s maybe early 1900s and then you know you can get up to Japan in the 50s and Korea in the 70s and 80s and you can see that this $5,000 per capita GDP is an inflection point for car ownership right now there's 500 million Chinese about to flip over that level. Okay so this is not this is a big number obviously. Additionally speaking of disruptive technology the Chinese have decided to leapfrog because they cannot compete in the conventional gasoline engine they're too late to the party straight into the next phase which is hybrid and electric and that's the way they're going to go. The slightly odd thing about Chinese behavior right now is that the I guess it's not odd but it's the way they're behaving is that if you look at car ownership growth against gasoline growth there's a disconnect because they're actually buying the cars but not driving them right now literally there's a status symbol effect that's going on but ultimately as I said that 500 million dollar excuse me 500 million threshold of people entering the middle class is a pretty incredible number and that's why we believe that there's so much pressure on the US oil market because in order to make room for all that demand even if it's more efficient demand you're going to have to get a lot more efficient here or wherever else people will stop using oil first. Going back to the first principle which is that the global oil market is near as peak potential size. And so if you see this analysis as taking place over some time frame and the real question is when certain things take place the price of gas reaches a point that American consumers really change their behavior when it is that those 500 million Chinese people actually become wealthy enough to purchase cars and drive them as opposed to just leaving them on the street what are some things that are going to slow this down and why do you think the what do you think makes I guess describe the timetable for when you see these major things happening Well Chinese wealth creation is almost inexorable so that's pretty much in our view is going to happen the price of behavior change in the US is occurring as we sit here I mean you're at, I mean we've come off a little bit but seasonally you'd expect oil and gasoline prices to fall a little bit outside summer but we're absolutely pricing at the point where people will change their behavior and they start by driving a bit less and we're not talking about the average working person we're talking about teenagers, we're talking about fixed income and so on and so the behavior shift is occurring where could it change you know on the supply side it's tough to see we think there's a lot of pressure in Saudi Arabia which obviously is the central, is considered the central bank of oil they've got a lot of domestic problems, a lot of needs to satisfy their own population growth and local issues, our lines on this are along the lines of I think there's 60 Saudi princes born every month they're building you know I think 250,000 new houses to try and keep people quiet but 65% of college graduates in Saudi Arabia graduate in theology of whom 60% of women who aren't allowed to drive cars as it happens you know there's a lot of things there that make us think that Saudi is not sustainable is what I'm trying to say so the supply side looks very worrying to us the whole Arab Spring issue really is difficult to imagine where we get a big upsurge in supply where you look where things are happening positively like in the US although there is a lot going on in unconventional and good growth from Canada you've got to remember that there's also been a major slowdown in the Gulf of Mexico going to the Mekonda disaster and on top of that the actual amounts that you're looking at here are relatively small in the global scheme of things so you know you're talking about 100 or 200,000 barrels a day of oil supply growth in the US which is great from the long term trend and the reversal it represents but it's really a rounding error in terms of Chinese demand growth which is more like 500,000 barrels a day per year so you've got 200,000 growth in the US from one of the most positive areas of global oil you're still not even getting close to what the Chinese are consuming incrementally I'm trying to think of areas where we could be wrong I mean Russia I guess is an area where you could see change we could see change in Venezuela but in the very near term it's difficult to believe that these trends aren't sort of inexorable the one that's really tough for us and we can't value at all is this issue of governments and governments and vettedness that's what's terrifying Wall Street right now the moon on Wall Street is very dark and very concerned we have no confidence in governments to solve problems that we don't even know have we don't have an idea to give them this is a problem of coming into a major recession with gigantic leverage and now you've got a choice of do you de-lever and make the recession worse or do you just keep spending and try and solve a credit card problem with a credit card neither of them are good ideas you know the backdrop here is really more important in many ways but explain a little bit how that relates to oil because I think that for folks that don't think about this issue on a daily basis it might not be clear why being in a Reinhardt rog-off recession is going to influence how quickly we adopt new technologies and how the energy markets play out globally yeah well I mean we struggled with any kind of coherent energy policy out of Washington I haven't been I've been coming here for years I've been able to identify one for many years the conclusion therefore is that the market this is why a lot of our talk is about what prices do to markets because we're assuming the government basically has no policy and you know I think it's simply because you have such a mishmash of conflicting interest on a bipartisan basis in the negative sense so you know the biggest coal states that can be democrat you know the biggest oil states can be democrat the more efficient states can be republican you know it's a tremendous mix of potential conflicts of interest and then overriding all of that you've got just the jobs issue you know this is the biggest single concern so the combination of the jobs and tax issue is then combined with the rhetoric and what you'll have Lisa Marginelli up on the stage here a bit later on as praise I basically stole from her which is the conspiracy of ignorance about oil in the U.S. which is to do with the fact that consumers really are somewhat ignorant of the truth of the global oil market simply because the units are complicated and you know it's tough to know how much a barrel of oil is relative to a gallon of oil and a gallon to a ton of coal and everything else and how that relates to solar which is a point the guy made just before which was you know the energy density issue is all quite confusing to consumers they tend to have a knee jerk response to that and that tends to be to blame you know to view because the guy that bought you 9-11 is the guy that is responsible for our oil dependence as it happens the U.S. is the least Middle Eastern oil dependent major economy in the world the Japanese are 85% Middle East oil dependent we're only 10, 10 or 15 but that doesn't change U.S. voters' perception and U.S. voters then vote for rhetoric that supports the ignorant you know the conspiracy of ignorance which exacerbates the lack of which is a kind of a Washington half an hour answer for me saying that you know there's nothing much to say but it becomes sorry about that I'll stop and what's the role of it so obviously if you're an oil company you have an extraordinary vested interest in keeping the oil markets maybe I could be wrong about this even this first premise but you have a vested interest in keeping the supply of oil stable and so how do you think that they're going to be able to if you see a much more turbulent world going forward do you think that big oil companies are going to be able to act where perhaps governments aren't going to be able to No, the governments control the resource and that's been the issue so as I said to you Exxon might now let's say Hugo Chavez is very sick they may get another regime change Exxon could be allowed back into Venezuela that would be the third time they've entered Venezuela in the last 40 years they've been nationalized twice presumably down the road they'll get nationalized again so it becomes very difficult and that's part of the under-investment cycle because as these governments tend to add volatility to oil and under-investment the oil companies are incentivized to invest at a conservative price and so a key issue with global oil supply growth has been not only to the governments under-invest but the companies under-invest if they over-invest they lose money if they under-invest they make more money so basically that's to say let's say you plan on 60 and the oil price comes in at 100 you win, you plan on 120 and it comes in at 100 you lose your job so you know there's a strong interest in them being very conservative and that's what they've been so if you look at our research for example of pictures we can show you really they've had almost no growth in oil production in the past 10 years despite prices that have generated everyone knows of Washington and the U.S. consumers alike, vast profits so they should arguably be reinvesting higher but you can't force a company with shareholders to reinvest at a higher rate it's kind of silly. Now some companies have been very aggressive and they've won and those will be all the U.S. EMP companies that have gone after this U.S. unconventional trend and it's been a huge success what the government what the companies not only oil but all energy companies wants is a stable environment because again it's not just about Hugo Chávez the uncertainty around tax changes it's a standard joke about the companies I cover such as an Exxon Chevron that the most risky investment province by a mile globally of all the ones they face including Venezuela, Angola you name it the most risky is the UK and that's because the tax rate changes there the most often. Here again you have a similar issue here in the U.S. we're permitting and this is partly the fault of BP but you know you've had a lot of uncertainty in the regulatory environment with particularly as regards tax I think they can handle regulatory environment being tightened because of an error or a terrible accident but ultimately some sort of clarity and long-term ability to plan on tax would be hugely helpful but you kind of don't expect to get it so I think that you have that volatility is also adding to their conservatism so they would tell you they've got plenty of opportunities one thing that we can say is that gas natural gas has a huge future I think that's one of the mega trends where traditional oil and gas is clearly overlapping with alternative fuels that's very much our view it's a consensus view but it's just so blatantly obvious that you know it's something that's worth highlighting again and again. So I think we have time for one or two questions are there any questions from the audience? Go ahead. Hi, Jia Chen. Will it be feasible for U.S. export car to China, India and the Arab world? Car or gas? To export cars? Yeah I mean the costs here are higher as a function of labor costs and raw material costs somewhat higher in the U.S. but the companies have been I think it's the major achievement unloaded of the Obama administration was the application of much tougher vehicle fuel efficiency requirements on the U.S. car industry and essentially the restructuring of the U.S. vehicle industry has been to me one of the great positives that was a necessary step that's been taken and generally speaking those U.S. major car manufacturers are now globally competitive not least because of the weaker dollar so in that respect they can the question that I'm not a car analyst the question we get is whether or not you'll be able to export natural gas and oil both of which essentially are very limited right now but we have currently the cheapest natural gas and some of the cheapest oil in the world here a lot of you would be aware that the spread between Brent Crude and WTI that's the western Texan to make immediate Oklahoma grade Crude is $20 a barrel for two crews that have the same calorific qualities and general qualities and that's a huge differential that tells you that we're onto something with U.S. unconventional oil and we should probably be exporting it would be hugely beneficial to the U.S. economy my suspicion is that the knee-jerk in Washington as always will be the wrong decision which will be to prevent the export and the same is occurring with natural gas there's more pursuit of natural gas exports in Canada than there is in the U.S. again the wrong-headed idea that somehow it's detrimental to energy security to export this stuff which would be but which by contrast would be so positive for the U.S. economy it's exactly what we need to do is export more stuff and create more jobs so I think we have time for one more very quickly I just wanted to get your opinion about Brazil as a as a new oil country our major oil country and also the investments of Petrobras in land and farmland in the in the equatorial region so the world to expand sugar pain derived ethanol and how that affects the the game well Brazil the the sub-salt discoveries which were previously broadly unknown because they're underneath salt and that's very hard to see through using conventional oil industry technology of course discovered vast amounts of contiguous oil which is not is different to what we've seen previously in deep water where the reservoirs tend to be very fragmented and challenged so this is a very enormous discovery a new totally new play the first that we've had in the in the new millennium and was clearly a massive story again the problem goes back to the fact that the government got involved and we're really struggling with how to value the impact of the government on Petrobras on Petrobras' spending and on Petrobras' development of that oil Petrobras was the worst performing major oil stock in equity markets of 2010 and it's the worst performing stock year today so if you want the view from Wall Street you can see that it's, and I'm talking about across pretty much all energy stocks last year for instance it performed worse than BP on stock markets we could be an idea of how badly, as you can imagine BP didn't have a great year last year to say the least Petrobras actually went, the stock price went down more that's because again what we really struggle with in energy in general is how do you value government and government behavior another point I'd make is that the time frame of governments this is vastly important in democracies where they have the time frame of a major deep water oil field development is now probably 12 to 15 years that means that you're in a situation where you'll probably go through four or five U.S. administrations maybe three or four U.S. administrations for every major oil field development which is another reason why the companies plan so conservatively additionally the government then as with Petrobras decides that it wants to get into local employment creation through requiring local content and building local refineries and again shareholders don't want them to do that so you know the government's taking a government decision the shareholders don't like that which is why they sell the stock you know again it's been interesting coming to Washington because the first time I came up here to speak about ethanol and energy to the Ways and Means Committee in a testimony they the Republicans that asked me just politely asked me not to be rude about ethanol and I said well I'm going to be rude about it because it's stupid and within within six months literally within six months it's been 2007 ethanol had completely fallen out of favor and was you know deeply unfashionable and it probably should be when we're using subsidized corn you know to make a subsidized fuel it's just crazy no subsidized fuel can ever be a long-term solution which is another major challenge for alternative energy and new energy developers is just this basic principle that if it's subsidized especially in today's government balance sheet situation with the possible exception of it being subsidized by the Chinese or maybe with the clear exception of it being subsidized by the Chinese or subsidized in the Middle East no other major OECD government is now in the position to subsidize anything they are bust don't underestimate how bad our debt problems are not least in the US but also in Europe so what we're doing is we're selling alternative energy stocks on the basis that the subsidies are going to have to go away and that's what's scaring us so much as you know Brazilian bagasse ethanol is actually globally competitive so that should have a perfectly reasonable future especially against all these biofuel mandates that there are in the world so I think a pretty good outlook on that particular ethanol because it's not subsidized all other subsidized forms of energy I think are under deep, deep threat here so with that we have to end this panel thank you so much for coming