Windfall
Page 36
First, tight oil production could be less responsive to price rises than this book expects. As discussed throughout these pages, no one knows for certain the pace and scale at which tight oil will respond to increased prices. The future portrayed in these pages is one in which tight oil does respond with some alacrity to price changes. Production levels change quickly enough both to meet growing demand and to discourage OPEC from trying to manage the markets as it has in the past. There are good reasons to believe this will be the case, but, given the newness of this resource, this is the first opportunity the world has to map out the critical relationship between tight oil production and global prices. As a result, no one knows for certain the pace and scale at which tight oil will respond to increased prices. Another relationship than the one described in these pages could prevail.
Second, demand for oil and gas could grow more robustly than expected over the coming years. The most likely driver of heightened demand would be more vigorous global economic growth. As of April 2017, the IMF foresees that the world economy will expand at 3.5 and 3.6 percent a year in 2017 and 2018. Behind these numbers are weak European growth, positive but anemic U.S. growth, and moderate but slowing growth in China. While any of these prognoses could prove wrong, the variable most likely to confound predictions is growth in China. BP’s Energy Outlook 2035 notes that if China’s growth is on average 1.5 percentage points a year lower than the company expects over the course of the next two decades, global energy demand will be nearly half a percentage point lower each year. The reverse also holds true; should China’s economic growth pick up, future energy demand will rise well beyond what is anticipated. This would put greater pressure on global energy supplies, perhaps beyond what new resources could satisfy.
Third, technology could surprise to the downside. Thus far, technological advances have been a major driver of the energy boom, as described earlier in this book. They have continued to create new opportunities for resource development, at lower costs. Without these developments, the boom would never have unfolded. The longevity of the energy abundance in part relies on the ability of technology to continue to bring down costs and extract more resources. But it also rests on the expectation that technology will continue to advance in ways that make the usage of oil and gas—and other forms of energy—more efficient over time, thereby tempering demand. For example, falling battery prices could make electric cars much more attractive and cost competitive with those run on combustion engines—and thereby lower demand for oil. Some believe that these advances will come earlier—and with greater impact—than is the norm. But there is also the possibility that technology disappoints, allowing demand to grow faster than expected or causing the costs of developing tight oil and shale gas to level out, rather than continue to decline.
Fourth, a geopolitical calamity or black swan event could suddenly diminish oil or gas supply in a way that has long-term effects. The new energy realities certainly give the world a cushion for geopolitical events of many proportions and for limited durations. But something as monumental as revolution in Saudi Arabia or civil strife in Russia could remove significant quantities of oil and gas from global markets to the point that energy is considered scarce long enough to affect geopolitical calculations. Some will retort that any successor regime in Saudi Arabia or Russia will have the same interests in producing as much oil and gas as possible. History, however, has shown that regimes that emerge following calamitous geopolitical events have struggled to recapture earlier levels of oil and gas production. Libya, for example, never returned to the production levels it had been at before the 1969 coup that brought Qaddafi to power. Nor has Iran come close to what it was producing before its 1979 revolution. Russia did eventually reach production levels similar to those under the Soviet Union, but it took years to do so.
Finally, environmental concerns could either lead to government policies in America that clamp down on fracking or cause companies to lose their social licence to operate. Either scenario could lead to a sharp reversal of the growth in oil and gas supply. Environmental groups in the United States have become more influential in recent years, scoring significant successes in gaining greater protection for local communities as well as action to combat climate change. But a segment of them also has an even more expansive objective: to ensure as few fossil fuels are developed as possible, for any reason and under any circumstances. U.S. federal and local governments face a challenging task of balancing legitimate environmental concerns with the strategic and economic benefits that come with the production and use of fossil fuels. Fortunately, as described earlier in this book, there does seem to be a middle ground, where responsible resource development can be undertaken at reasonable costs.
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In 2000, George Mitchell, the crafty and stubborn Texan who helped launch the energy boom, was asked what America’s energy landscape would be like in 2020. “Oil in the United States is very hard and expensive to find,” he said. “It’s necessary in our economy, and a reversal of declining production doesn’t seem possible.” During the same interview, Mitchell also contended that the United States would be a major natural gas importer by 2020.
Since the time of that interview, the energy realities for the United States—and the world—have taken a turn that even the visionary individual most responsible for the new energy boom could not anticipate. The changes have happened at whiplash speed and, with them, the landscape of foreign affairs and national security has changed. Understanding the connections between the energy boom and geopolitics is a critical prerequisite for anyone, in any country, or nearly any industry or government, hoping to make wise decisions dependent upon how countries, companies, and even individual leaders interact. From the United States to Argentina, Australia to China, Russia to the Middle East, Europe to Venezuela and beyond, policymakers, academics, and investors alike need to size up how the new energy dynamics and geopolitics will transform their futures. This book has sought to illuminate these new dynamics and to articulate some of the fresh approaches that so many actors will need to adopt. Serendipity has carried many quite far, but new strategies are essential to reap further rewards.
Acknowledgments
The first draft of this book, written several years ago, focused on a possible precipitous decline in the price of oil and anticipated the geopolitical fallout that might result. Much has happened since that time, in the world and to this book project. As events rapidly unfolded, I was always seeking to discern the large and lasting trends and separate them from the noise. Writing this book, at this moment in history, has been both exciting and demanding. And, partially as a result, I have incurred many debts of deep gratitude in the process.
My first thanks belongs to Graham Allison, and my many colleagues at the Belfer Center for Science and International Affairs and the Harvard Kennedy School. I arrived at Belfer ten years ago, eager to broaden my areas of expertise beyond the Middle East after a very intense period in government focusing on Iraq and Afghanistan. Graham not only provided a happy home for these intellectual pursuits, but encouraged me as I built out a small team of experts working on the geopolitics of energy and created a project designed to explore the complex connections between energy and foreign policy. My other colleagues—Nick Burns, Bill Clark, Niall Ferguson, Bill Hogan, Henry Lee, Leonardo Maugeri, Joe Nye, and others—all provided me with much needed support and guidance as I dove deeper into the intersection of energy markets and global politics. I am also grateful for the support provided by BP, Loomis and Sayles & Company, and the Middle East Initiative to the Geopolitics of Energy Project at the Harvard Kennedy School, under whose auspices I conducted much of the work for this book. The Environmental and Natural Resources Program and the International Security Program, both at Harvard’s Kennedy School, also provided welcome institutional and other support.
I also owe special thanks to friends and mentors who have played a special role in my intellectual and professional life. In particular, Nick B
rady, John Hess, Richard Haass, Steve Hadley, and Bob Zoellick have gone extra distances to create opportunities for me to deepen my energy expertise and have made special efforts to expose me to new ideas and linkages. A wide range of other people also gave of their time and expertise to help me make this book the best it could be. Although they cannot all be acknowledged, I met with hundreds of people in more than twenty countries over the last four years of research for this book. From Latvia to Iraq to Japan to Brazil, I am grateful to every person who sat with me, their words illuminating yet another piece of the complex puzzle I have sought to understand and to explain in the pages of this book.
Closer to home, many others made specific efforts to help me craft the manuscript. Soon after I set my mind to writing this book, I had breakfast with Dan Yergin, the indisputable guru of energy geopolitics, who wrote his wonderful book The Prize while at Harvard’s Kennedy School. He gave me several good pieces of advice, much of which I followed religiously. I embraced one of Dan’s recommendations with particular vigor: hire a fleet of supersmart Harvard graduate students to provide research assistance. And that I did, reaping enormous gains from their intelligence and dedication. To Siddharth Aryan, Joel Bell, Lauren Bloomberg, Rita Chung, Chris Cote, Tobias Cremer, Rani Daher, Cathy Guo, Takuma Iino, Guy Leung, Adam Papa, Scott Quigley, Jaffar al-Rikabi, Hossein Safaei, Razzaq al-Saiedi, Izran Saleh, Scott Siler, Julia Stern, Scott McNally, Blake Meulmester, Ok-Kyoung Song, Sun Ting, Charlie Warren, Alex Yergin, and Aaron Young, I offer my sincere thanks. But above all, I am deeply in debt to two researchers in particular, without whom this book would have been impossible for me to write: Can Soylu and Nikoleta Sremac. They treated this book as if it were their own. Their dedication, good-nature, intelligence, and commitment was extraordinary and for all their work I am very grateful.
This was my first effort to reach a more popular and less academic audience, and to the extent I succeeded, I owe special thanks to Howard and Nathan Means, Richard Todd, and—especially—Michael Carroll. All provided invaluable advice on how to present such a complicated and technical matter to my audience in a way that is (hopefully) easy and pleasurable to digest.
I also leaned on many friends, colleagues, and experts to read the book when it was in its manuscript phase and would like to acknowledge their contributions. Bob Blackwill, Colin Davies, David Gordon, Richard Haass, John Hess, and Bob Zoellick, all provided treasured advice and recommendations on the whole manuscript. John Deutch, Andreas Goldthau, Leslie Palti-Guzman, Bo Kong, Holly Morrow, Morena Skalamera, and Kaho Yu offered me valued expert opinion on different portions of the book. This book is undoubtedly a better piece of work thanks to the help I received from this group.
I would also like to sincerely thank Alice Mayhew and Stuart Roberts—and their colleagues at Simon & Schuster—for all their support and patience throughout the process of writing this book. I am grateful for their strategic guidance and for their tolerance of extended deadlines and heated debates, all of which enabled this book to evolve in a positive direction. I also appreciate the efforts of Andrew Wylie, who has been invaluable in helping me navigate the process of making this book a reality.
I owe a few people for the extraordinary support and care they provided to me during the whole time this book was under way. I have dedicated this book to my parents, Michael and Kathi O’Sullivan, for the encouragement they have given me throughout my whole life, in every realm, but especially in the area of education and intellectual pursuits. My sisters, Kristin and Kate, also provided essential support and reinforcement, as well as much-needed breaks and laughs. And, finally, I want to extend my warmest thanks and appreciation to Arnaud Lacoste. In many ways, he has lived with this book as I have, tolerating piles of papers, dinners propped on books, and all the stresses associated with writing a book. But most important, in his relentless intellectual curiosity and constant efforts to push beyond the obvious, Arnaud was and is a constant source of inspiration for me.
About the Author
© M. STEWART
Meghan L. O’Sullivan is the Jeane Kirkpatrick Professor of the Practice of International Affairs at Harvard University’s Kennedy School of Governent. She is also the Director of the Geopolitics of Energy Project, which explores the complex interaction between energy markets and international politics. Between 2004 and 2007, she was special assistant to President George W. Bush, a time which included two years as Deputy National Security Advisor for Iraq and Afghanistan. She lives in Cambridge, Massachusetts. Windfall is her third book.
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Notes
Preface
He made a forceful and compelling case: “No country should view its development path on its own,” Xi said. “Development is of the people, by the people and for the people.” Xi Jinping, “Opening Plenary” (speech, World Economic Forum Annual Meeting 2017, Davos, Switzerland, January 17, 2017), www.weforum.org/agenda/2017/01/full-text-of-xi-jinping-keynote-at-the-world-economic-forum.
“Say no to protectionism”: Ibid.
a newly sworn-in President: Donald J. Trump, “Inaugural Address” (speech, Washington, D.C., January 20, 2017), www.whitehouse.gov/inaugural-address.
Jervis writes of the tendency: See Robert Jervis, Perception and Misperception in International Politics (Princeton: Princeton University Press, 1976).
Introduction
The United Nations had estimated: John Heilprin, “UN: Death Toll from Syrian Civil War Tops 191,000,” USA Today, August 22, 2014, www.usatoday.com/story/news/world/2014/08/22/united-nations-syria-death-toll/14429549/. The U.N. special envoy in Syria more recently estimated that 400,000 people have been killed in the civil war as of April 2016. John Hudson, “U.N. Envoy Revises Syria Death Toll to 400,000,” Foreign Policy, April 22, 2016, http://foreignpolicy.com/2016/04/22/u-n-envoy-revises-syria-death-toll-to-400000/. The 400,000 estimate is close to more recent reports from the Syrian Center for Policy Research (470,000 as of February 2016), and the Syria Network for Human Rights (450,000 as of January 2017).
Since 2010, U.S. crude oil production: For example, in 2011, the U.S. Energy Information Administration forecast that in 2012 the United States would produce 5.4 mnb/d of crude oil; the actual production in 2012 was 6.5 mnb/d. See “U.S. Field Production of Crude Oil,” U.S. Energy Information Administration, August 31, 2016, www.eia.gov/dnav/pet/hist/LeafHandler.ashx?n=pet&s=mcrfpus2&f=a; “Annual Energy Outlook 2011,” U.S. Energy Information Administration, April 26, 2011, www.eia.gov/forecasts/archive/aeo11/data_side_cases.cfm?filter=oil#summary; “Annual Energy Outlook 2012,” U.S. Energy Information Administration, June 25, 2012, www.eia.gov/forecasts/archive/aeo12/data_side_cases.cfm?filter=oil#summary; “Annual Energy Outlook 2013,” U.S. Energy Information Administration, April 15–May 2, 2013, www.eia.gov/forecasts/archive/aeo13/data_side_cases.cfm?filter=oil#summary.
global oil demand for: Global oil demand stayed at 92 mnb/d from the end of 2013 through mid-2014, after having risen continuously throughout 2013. The low oil prices that followed helped bolster demand for oil, pushing demand growth to highs (1.7 percent or 1.6 mnb/d) not seen in the previous five years. “Table 1: World Oil Supply and Demand,” International Energy Agency—Oil Market Report, February 9, 2016, https://www.iea.org/oilmarketreport/omrpublic.
In my writings and speeches: See, for instance, Robert D. Blackwill and Meghan L. O’Sullivan, �
��America’s Energy Edge: The Geopolitical Consequences of the Shale Revolution,” Foreign Affairs, March/April 2014, https://www.foreignaffairs.com/articles/united-states/2014-02-12/americas-energy-edge, wherein Bob Blackwill and I wrote, “The most dramatic possible geopolitical consequence of the North American energy boom is that the increase in U.S. and Canadian oil production could disrupt the global price of oil—which could fall by 20 percent or more.” Also see Meghan L. O’Sullivan, North American Energy Remakes the Geopolitical Landscape: Understanding and Advancing the Phenomenon, New York: Goldman Sachs, June 2014, www.goldmansachs.com/our-thinking/pages/north-american-energy-summit/reports/mos-north-america-energy-remakes-the-geopolitical-landscape.pdf, wherein I wrote, “Although it may not be possible to definitively predict the impact of the unconventional boom on the price of oil, one can claim with conviction that this energy phenomenon has placed—and will continue to place—downward pressure on the oil price by introducing significant new sources of global supply.” Also see Meghan L. O’Sullivan, “A Better Energy Weapon to Stop Putin,” Bloomberg View, March 11, 2014, www.bloombergview.com/articles/2014-03-11/a-better-energy-weapon-to-stop-putin, wherein I wrote, “The U.S., by adding 2.5 million barrels of oil to global markets in the last three years, has prevented the price of oil from edging higher in the face of disruptions in Libya, Iran and elsewhere. Should the U.S. continue to increase its oil production, as is widely assumed, it could create pressure to further lower the price.”
Even as the price of oil dipped just below: “Crude Oil (petroleum); Dated Brent Daily Price,” Index Mundi, September 6, 2016, www.indexmundi.com/commodities/?commodity=crude-oil-brent&months=60. In June 2012, the Brent price of crude dipped briefly below $100; with that exception, monthly crude prices had exceeded $100 a barrel since February 2011.