The Wilson Center Presents: Global Energy Forum – Revolutionary Changes and Security Pathways

The Wilson Center’s Global Europe Program held the Global Energy Forum on Monday, September 21 to discuss the current revolutionary changes in the international energy system, including growing U.S. production and new technology development worldwide, and the impacts of geopolitics on global energy market.

Speakers and main outcomes for the keynote address and panels were as follows:

Adam Sieminski, Administrator at the US Energy Information Administration, delivered the keynote address. His discussion covered all the plausible scenarios creating a wide potential range in the price of oil in short and long term energy markets.
Panel 1 discussion suggested there is reasonable possibility there won’t be low oil prices for the foreseeable future. The three main topics of most concern are hedging, price volatility, and geopolitical risk.
- Amy Myers Jaffe, Executive Director of Energy and Sustainability at the University of California-Davis discussed the fact that the current cycle may not be different from past cycles, and we are likely at the bottom of a cycle that will not last forever.
- Robert Johnston, CEO and Natural Resources Head of the Eurasia Group, discussed how geopolitics drive energy prices.
- David G. Victor, Professor of International Relations and Pacific Studies at the University of California-San Diego discussed the changing role of the Strategic Petroleum Reserve (SPR), and how the U.S. can no longer use it for import substitution because oil prices are now global and price shocks anywhere in the world market impact the U.S.
Panel 2 covered the new pathways that need to be developed to advance global energy security to make the global energy market more resilient.
- David L. Goldwyn, Principal at Goldwyn Global Strategies, LLC
- Jan H. Kalicki, Public Policy Fellow and Energy Lead at the Woodrow Wilson Center discussed the building blocks to move forward on a beneficial global energy system.

The forum began with Adam Sieminski’s keynote address about the energy world ahead. The following is a summary of the main points.

Short term energy markets

The U.S. has experienced a rapid increase in natural gas and oil production from shale and other tight resources. But since January 2015, shale production has slowed down from 2012’s steady production rates. Crude oil supplies will reach historical highs before 2020, but longer term quantities are dependent on prices, resources, and technology.

OPEC crude supply growth will taper out by the end of 2016 for the following reasons:

The Organization of Petroleum Exporting Countries has only a little bit of non crude liquids.
Economic growth in all OECD countries is creating a general trend of increasing internal demand, lower prices, and increased employment.
OPEC does not have much spare capacity. With the Iranian nuclear agreement, Iran’s oil will be back on the market. It’s unknown where the demand will be to absorb the additional supply.

For oil prices, the market-implied confidence band derived from the liquid options market represents peoples’ real views because it puts real money into the market. The market’s future confidence interval ranges from $25 to $100 per barrel. Though this is a wide range, it reflects the uncertainty in the global market, as described here:

$25/barrel – Much of the LNG around the world would be indexed. Prices could drop this low if Iran successfully reenters the world market while oil demand in the Chinese market stumbles, diminishing access to the Asian market.
$100/barrel – Prices could rise this high due to energy geopolitics. Libya and Sudan could continue to experience outages while similar disruptions occur elsewhere in the world marketplace.

Sieminski said U.S. Energy Information Administration (EIA) data points toward interesting trends in the global energy markets, even if low oil prices continue.

Regarding U.S. export policy, the impact of either keeping the export restriction or lifting it is minor. With low domestic oil and gas prices, domestic production is constrained, and one would not again see the gains that have come from lowering U.S. oil imports over the past five years.

Longer Term International Energy Markets

Sieminski cited renewable energy and nuclear power as the fastest growing sources for energy production.

Coal consumption could be lower than the international energy outlook 2013 numbers.

Asian coal production numbers will go down.
S. numbers have the ability to go down.

World net hydro projects

Hydropower projects are growing in the U.S. and Canada.
Hydro projects continue to develop in Canada’s maritime area, with the power destined for the U.S.

World natural gas production

Growth in gas in Russia and the Middle East could be quite important.
The China gas numbers are not growing, which leaves open an opportunity for China to increase its own LNG production instead of coal production.

Projected Iranian oil production over the next year and a half

First, the Iranian nuclear agreement needs to be implemented and the timing determined.
Second, because of production limitations, Iran may not be able to reach the levels it produced previously. Later speakers explained the difficulties Iran will have in reactivating its oil fields.

The U.S. oil export policy issue in a low price environment

S. production is still sustainable in a low price environment.
S. production may have already hit the maximum and is now starting to fall, which suggests the refinery bottleneck may be less of a problem.
Giving companies the time to invest in equipment like splitters to process products like lighter oil would assist in meeting the requirements.
In AEI’s study, U.S. oil exports would either have no impact on gasoline prices or lower them slightly.
Historically, U.S. gas prices have been tied closely to the global price of oil. The U.S. is both a big exporter and importer of oil.
Allowing oil swaps with Mexico would be a way of relieving pressure in the market, and would work well in today’s environment.

An important inflection point for the U.S. is $50/barrel.

If prices are above $50, the situation looks good for the U.S. oil industry.
If prices drop below $50, project cuts would be significant. Canada’s oil sands would take the largest hit, as well as deep water development and other expensive projects.
S. investors will be resilient and still be able to make their plays at $40/barrel, which is why U.S. supplies are stable.
While U.S. production may fall, the petroleum industry will still be a pretty healthy sector. The U.S. will remain an energy producer and, more importantly, U.S. shale will be one of the first to go on line.
Low prices have spurred advances in oil field technology, allowing producers to be more productive and resilient. For example, well productivity has increased by shifting from fracking to re-fracking wells, a lower cost operation that increases recovery rates.

The market will rebalance from a demand-led recovery over time. Global oil demand is still growing, and will continue to grow.

The industry is not reinvesting in new production or even replacing declining production, allowing fields to decline by 10-20 percent a year. This will help the market rebalance over time.
When the rebalancing will occur is not known.
Demand increases aren’t likely to come from China, because the economic growth pace has slowed. The ‘income effect’ in the U.S. from low domestic gas prices is increasing the demand increase. But, this has not yet reversed the long-term structural decline from efficiency measures.
The non-OPEC non-shale decline will underpin the market rebalancing.
Expensive projects—such as those in the Arctic and in deep water locations—will be cancelled.
Prices will stay around $50/barrel next year.
In conclusion, rebalancing will be achieved when oil prices are high enough to balance supply with demand. Not enough demand exists at present to drive investment in expensive projects such deep water oil fields and the Arctic.

A question was asked the energy project investment versus return ratio, especially since projects are generally more expensive.

In response, Sieminski acknowledged the higher costs because the global market is shifting from conventional resources to energy resources that are more difficult to access. In the U.S., for example, shale accounts for nearly half of all oil production. Regarding the return on investments, technology and resource changes over time are two of the more important factors in energy projects, outweighing the money that’s earned. The most important aspect is the price that the consumer is willing to pay.

Panel 1: A Global – and Revolutionary – Energy System

Amy Myers Jaffe started the first panel on oil and geopolitics, saying that the oil industry is a cyclical industry, and the geopolitical element built into the oil boom and bust cycle doesn’t receive much attention.

The current oil price collapse mirrors the cyclical downturns of past decades. Jaffe said cycles are characterized by:

Demand Destruction – A decade of high oil prices, combined with policy intervention in the Organization for Economic Co-operation & Development and China slowed oil demand growth and enabled innovation and advanced clean energy solutions. High oil prices and recession also created financial crises that curtailed demand.
Supply Side Bubble – High oil prices stimulated drilling innovations leading to an over-supply of petroleum. Shale technology is a game changing factor, the same as North Sea and Gulf of Mexico deep water drilling in the 1980s.

Supply-side oil production produces “petrodollars” that have to be recycled back into the system. Military equipment and supplies are the most consistent product purchases.

As oil prices fall, more social tension and instability occurs across oil producing regions. With heavily armed governments in power, extended wars result that damage infrastructure and create a discontinuous trend.

If too much infrastructure is destroyed and too much production is disrupted in the Middle East during an unstable period, the oil price trend can reverse itself and head upwards.

Insurgencies target oil and gas facilities. ISIS activities have currently reduced oil production by approximately 1.9 million barrels per day in Libya, Yemen, Syria, and eastern Iraq.

ISIS, no matter how much it threatens the oil field engineers, hasn’t been able maintain production levels at the small fields it has captured.”

“If ISIS touches it, they are basically destroying each field that they get control of.” Jaffe said. “Any of the estimates of income that were received from the oil fields has now disappeared, because they are targeting a lot of the places. This creates two risks – they are destroying the fields by accident as they try to produce. Or the more recent risk is they realize they can’t produce themselves, and so they blow up anything they can get access to.”

The 1.9 million barrels per day loss hasn’t been felt in the market yet because, for geopolitical reasons, Saudi Arabia has increased production to make up that gap and the U.S. is producing an additional 4 billion barrels.

Oil supply geopolitical issues that are on the horizon for the next two to five years include:

Possible supply gap depending on trends in Saudi, Iraq, and Iran.
ISIS military campaign damage to production facilities.
Destabilization from Middle East regime change. Higher production from Iran is questionable as the amount of damage from oil field inactivity is actually greater than the ISIS destruction in other countries. Because of sanctions, Iran had to stop re-injecting gas. One technical reality is that the same pressure levels can’t be restored to fields that have been allowed to rest.
Russian struggles with its loss of access to foreign capital. The previous two times that Saudi Arabia waged a price war during periods of Russian instability, Russian production fell dramatically.
Low oil prices pressing Venezuelan industry production.
Canadian oil sands major production cancellations.
Arctic drilling delays and major companies slashing their mega-project budgets.
S. shale oil and gas market constraints. Unless the U.S. export ban is lifted, supplies may be reduced. Though the U.S. thinks shale is the answer, there are limits to how much shale oil can be produced.

David G. Victor gave a presentation on making energy revolutionary, saying that climate change is a fundamental international problem. While a lot of revolutionary things are going on in the energy market, the industry as a whole is not very revolutionary, and doesn’t change that much over time. This is a good thing, he added, as “you don’t want excitement when it comes to electricity.”

The interlocking nature of the fuels and infrastructure for world primary energy changes very slowly, he said, on a 40-50-year time scale. Climate change, however, needs to be addressed much more rapidly.

Describing the contours of what a serious program would look like, Victor said there first needs to be a market pull, or signals from firms and governments that they are sincere in driving investments in new energy infrastructure. Because market failure is common, this pull alone may not be enough.

Market failure results in an underinvestment in innovation. Those who withhold investments in more efficient ways to create cleaner fuel still reap the benefits from other companies’ work.

The key question to be answered is how to help augment the signal where the supply of fundamental new ideas can be developed. This can come from U.S. federal spending on energy research and development. Since 1980, research dollars have fluctuated from nonexistent to brief blips upwards to the budget mean.

Generating viable new ideas requires public sharing. Private firms and governments need to be comfortable working together, even across international boundaries.

International cooperation is required for all things related to climate change. In the last few years, cooperation over methods has made a huge shift as small groups of countries focus on specific tasks. Making progress on auspicious issues requires progress on technological innovation.

Paris, France, is setting a framework for a bottom up, more decentralized type of government. The Paris process requires innovation, but most discussions to date have focused on other aspects, such as mitigation.

Panel 1 – audience questions and answers

What is the significance of being in a high or low price environment? – In a volatile price environment, international oil companies have difficulty constructing price strategies. Thinking solely about prices reflects insecurity from uncertainty and frequent geopolitical shifts. Major policies need to be separated from prices. Just because there is a conflict in the Middle East, the Strategic Petroleum Reserve (SPR) doesn’t need to be drawn down. Regarding SPR, every country has a different balance in its reserves, so countries are able to trade their varying quantities of light and heavy oil, for example.
If high oil prices are a reason for not having a carbon tax, why shouldn’t a carbon tax be pursued now in a low oil price environment? – Some analysts are showing and cataloging the ways that regulatory policies have created a shadow price for carbon. The topic requires a more straightforward policy.
How stable is the Saudi Arabian leadership? – Since 2009, Saudi Arabia has warned Russia that if it did not act cooperatively, the Saudis would start a price war, which is what has occurred. This is believed to be the main focus of Saudi Arabia’s oil policy.
Why doesn’t the current technology and legal system distinguish between the public and private sector? – The entire intellectual property is swinging way too far in the direction of protection. This adds nothing to innovation, and actually blocks innovation in some cases. With collaborative research & development projects, private firms require returns on investments. There are many ways to accomplish this, including creating enterprise zones in groups of countries. By taking a big issue like climate change and breaking it down into smaller parts, the private sector can be incentivized for further action and investment.

A comment was made about the U.S. ban on crude oil exports, and how that doesn’t really benefit the consumer. Every time a supply bottle neck forms, inefficiencies are created that have unintended consequences, such as shutting down heavy oil refineries that could supply SPR.

The last question was about the locations with the most geopolitical risk. Jaffe responded that, outside the Middle East, four locations—Venezuela, Russia, Brazil, and Canada/Alaska—will suffer the most if oil prices stay where they are today. Jaffe elaborated on three of the locations.

Russia could have the largest amount of disruption because so many parties have their personal wealth tied to business deals and industries. The longer that the reduced revenue festers, the greater the chance that the institutional framework, ownership structure, and ability to raise capital would be destabilized.

Brazil has escaped the attention of the forecasters, she said, but it’s political and institutional instability could lead to a situation totally different than the period of rising oil prices.

Canada and Alaska are experiencing almost a resource curse problem, Jaffe said. Canada bet heavily on the oil sands, and now is having a “crisis of identity” regarding internal politics and the direction the economy should grow.

Alaska is also facing a very difficult future. Jaffe had traveled to Alaska with some of her students, who explained to her that small indigenous communities don’t have to worry about climate change effects because natural gas exports will compensate with large amounts of revenue. Jaffe said a subsequent study she conducted showed otherwise and that Alaska really needs to get its fiscal house in order.

Panel 2: Pathways to Global Energy Security

David Goldwyn discussed the pathways to security saying that traditionally, since 1975, the price risk in oil prices has been hedged by commercial inventories that supplied oil when the markets were disrupted, available spare capacity, and SPR.

Having this ability protects the economy from oil price shocks, deters other countries from using oil as a weapon, and provides loss absorption capability while the market adjusts to a new situation.

Since 1975, however, the market has changed and the SPR can no longer serve as an import substitute. The market is now a global one, so a price shock anywhere in the world could affect the U.S. even if the U.S. provides all of its own oil. As a result, policies have been changed so SPR can be used to supply the global market.

Goldwyn added that with the advent of paper markets, serious threats of disruption are transmitted into price formation almost immediately. U.S. actions to address supply disruptions are very important in short term price formation.

Goldwyn said that selling off SPR would be an odd action and, instead, the U.S. needs to take the long view on energy security.

No one knows if Saudi Arabia will return to its market balancing role because it is producing at maximum capacity right now, and may not have the spare capacity in the future. This could make buffer stocks more important in the future, given that reserve levels have been low since 2011.

The U.S. cannot replace the serious assembly of geopolitical risks because the U.S. is a surge producer, not a swing producer. The U.S. has the ability to raise production in a year, but not weeks.

To be a surge producer, a country needs:

Enough certainty that the price signal is enough to change a business.
Lenders willing to lend, crews reassembled, and companies making decisions about the leases they will pursue.

This is another demonstration of why the U.S. needs to maintain and build buffer stocks.

The U.S. Department of Energy’s Quadrennial Energy Review (QER) confirmed the need for SPR, but said it won’t do much good unless it can be used, which includes pipeline capacity for delivering the oil to market. The President needs the ability to access SPR before an economic crisis actually occurs.

Jan H. Kalicki discussed making changes in the international energy security system.

He talked about what needs to be done in terms of having a cohesive policy. Multiple agencies concerned with energy policy, and the Presidential lead is lacking. Many observers have called for a White House energy advisor in order to make progress.

More work could also be done on multi-national scale. In North America, the U.S. could dialogue with Canada and Mexico about renewables and electric power, and other elements of an energy strategy.

To conclude, Kalicki presented eight building blocks that could be used to move forward on a global energy security structure:

A more cohesive national approach, structural as well as policy. Ending the U.S. crude oil export ban would be an example.
Integrate energy and climate change policy.
Strengthen and expand U.S. EIA and coordinate emergency responses.
Take advantage of merging consumer and producer interests.
Promote a global revolution in unconventional energy, notably shale production.
Advance a competitive gas market.
Use opportunity and obligation to end energy poverty.
Protect sea lanes through greater collaboration.