Windfall

by Meghan L. O'Sullivan

  For example, according to one projection: BP p.l.c., BP Energy Outlook: 2016 edition (London: BP, 2016), slide 91, www.bp.com/content/dam/bp/pdf/energy-economics/energy-outlook-2016/bp-energy-outlook-2016.pdf.

  This phenomenon will not be limited: Ibid., slide 45.

  India and the economies of Africa: “Country insights: India,” BP Global, www.bp.com/en/global/corporate/energy-economics/energy-outlook/country-and-regional-insights/india-insights.html; “Regional insights: Africa,” BP Global, www.bp.com/en/global/corporate/energy-economics-energy-outlook/country-and-regional-insights/africa-insights.html.

  When it comes to oil—as opposed to: ExxonMobil, The Outlook for Energy: A View to 2040, 72.

  One reason to expect positive growth is that: More than 90 percent of the world’s transportation runs on petroleum-based fuels. “IEO2016: Energy use: Liquids,” U.S. Energy Information Administration, https://www.eia.gov/outlooks/aeo/data/browser/#/?id=15-IEO2016®ion=4-0&cases=Reference&start=2010&end=2040&f=A&linechart=Reference-d021916a.2-15-IEO2016.4-0~Reference-d021916a.26-15-IEO2016.4-0~Reference-d021916a.34-15-IEO2016.4-0~Reference-d021916a.18-15-IEO2016.4-0~Reference-d021916a.10-15-IEO2016.4-0&map=&ctype=linechart&sid=Reference-d021916a.26-15-IEO2016.4-0~Reference-d021916a.34-15-IEO2016.4-0~Reference-d021916a.18-15-IEO2016.4-0~Reference-d021916a.10-15-IEO2016.4-0~Reference-d021916a.2-15-IEO2016.4-0&sourcekey=0. In contrast, 56 percent of global petroleum consumption is used for transportation.

  By one account, the need for fuel: BP p.l.c., BP Energy Outlook: 2016 edition (London: BP, 2016), slide 23, www.bp.com/content/dam/bp/pdf/energy-economics/energy-outlook-2016/bp-energy-outlook-2016.pdf.

  With 57 cars per 100 people: ExxonMobil, The Outlook for Energy: A View to 2040, 17.

  This bump-up in global ownership: ExxonMobil anticipates that fuel efficiency will improve from 25 miles per gallon in 2014 to 45 mpg in 2040; BP expects movement from 30 mpg to 50 mpg in 2035. ExxonMobil, The Outlook for Energy: A View to 2040, 18; BP p.l.c., BP Energy Outlook: 2016 edition, slide 25.

  Others—such as Fatih Birol: See Fatih Birol, “Special Briefing: World Energy Outlook,” (keynote speech, The Atlantic Council Global Energy Summit, Abu Dhabi, United Arab Emirates, January 13, 2017), www.atlanticcouncil.org/news/transcripts/special-briefing-world-energy-outlook.

  As Lincoln Moses, the first head: See Frederic Murphy, “Ideas for the new NEMS Liquid Fuel Market Model” (white paper, Fox School of Business, Temple University, Philadelphia, PA, September, 2009), 4, www.eia.gov/outlooks/documentation/workshops/pdf/fred%20murphy%20lfmm%20white%20paper.pdf.

  BP, in fact, identifies: BP p.l.c., BP Energy Outlook: 2016 edition (London: BP, 2016), 74–76, www.bp.com/content/dam/bp/pdf/energy-economics/energy-outlook-2016/bp-energy-outlook-2016.pdf.

  Growth in world energy demand: Oil demand would decline by 5 percent; natural gas demand by 7 percent; and coal by 8 percent. Ibid.

  Certainly, there is sufficient uncertainty: Even apart from overall rates of growth, the pace of the restructuring of the Chinese economy will also have a significant impact on energy demand. See ibid., slides 58–59.

  Nearly two-thirds of them: See Andrew Browne, “China Bulls Become an Extinct Species,” Wall Street Journal, April 5, 2016, www.wsj.com/articles/china-bulls-become-an-extinct-species-1459829989.

  The second scenario BP identifies: BP p.l.c., BP Energy Outlook: 2016 edition, slides 78–81.

  Policies such as putting a significant: Ibid., 79.

  By convention, the reference case scenarios: Some improvements in existing technologies, however, are factored in over time. The AEO2015 Reference case projection is a “business-as-usual trend estimate, given known technology and technological and demographic trends.” U.S. Energy Information Administration, Annual Energy Outlook 2015; With Projections to 2040 (Washington, DC: U.S. Department of Energy), iii, https://www.eia.gov/forecasts/archive/aeo15/pdf/0383(2015).pdf.

  For example, ExxonMobil: ExxonMobil assesses that in 2014, 94 percent of world’s transport ran on oil. It expects this amount to decrease to 89 percent in 2040. The company forecasts that 40 percent of new vehicles purchased in 2040 will be conventional hybrids. But the company sees only marginal growth in electric vehicles, given current constraints; plug-in hybrids and electric cars will, in ExxonMobil’s view, account for less than 10 percent of all car sales in 2040. ExxonMobil, The Outlook for Energy: A View to 2040, 19, 20, 23, 72.

  However, BP’s 2017: See “The impact of electric cars on oil demand,” BP Global, 2017, www.bp.com/en/global/corporate/energy-economics/energy-outlook/electric-cars-and-oil-demand.html.

  The company also acknowledges: Spencer Dale and Thomas D. Smith, “Back to the future: electric vehicles and oil demand,” (Speech, Bloomberg New Energy Finance: The Future of Energy, EMEA Summit, London, UK, October 2016), http://www.bp.com/en/global/corporate/media/speeches/back-to-the-future-electric-vehicles-and-oil-demand.html.

  Rather than focusing on the low: Specifically, Dr. Ghouri’s work predicts a decline of 13.8 mnb/d of oil in comparison to what would have otherwise been consumed in 2040. Dr. Salman Saif Khan Ghouri, in-person conversation with the author, Qatar Petroleum Headquarters, Doha, Qatar, August 22, 2016.

  When I asked about the reaction: Ibid.

  She posits a number: Belova’s “Status quo” scenario sees global oil demand leveling off by 2020 due to fuel economy standards and decreases in demand from the power and industry sector. In her “most likely” scenario (which she calls the base case), the world sees a 7 percent drop in oil demand by 2035; her “innovative” scenario sees an absolute drop by 17 percent in the same time period. See Grigory Vygon et al., “Technological Progress in Motor Transport: How Close is Peak Oil Demand?” (executive summary, VYGON Consulting, Moscow, Russia, October 2016), https://vygon.consulting/upload/iblock/e46/vygon_consulting_oil_demand_2016_executive_summary_en.pdf.

  With this advance in mind: Tom Randall, “Here’s How Electric Cars Will Cause the Next Oil Crisis,” Bloomberg, February 25, 2016, www.bloomberg.com/features/2016-ev-oil-crisis/.

  According to BNEF, this would displace: “Electric Vehicles to Be 35% of Global New Car Sales by 2040,” Bloomberg, February 25, 2016, http://about.bnef.com/press-releases/electric-vehicles-to-be-35-of-global-new-car-sales-by-2040/.

  BNEF made various calculations: Randall, “Here’s How Electric Cars Will Cause the Next Oil Crisis.”

  Anthony Yuen of Citigroup suggested: Anthony Yuen, in-person conversation with author, Aspen, CO, July 7, 2016.

  perhaps between 300 and 400: It is also useful to note that, in the United States, there are about 800 vehicles per 1000 people, while many other developed countries, such as Canada, Japan, and those in Europe, have a range of 500 to 700 vehicles per 1000. “All countries compared for transport; motor vehicles per 1000 people,” NationMaster, 2017, www.nationmaster.com/country-info/stats/Transport/Road/Motor-Vehicles-per-1000-people. To learn more about a number of studies predicting future Chinese vehicle use, see Huo et al., “Projection of Chinese Motor Vehicle Growth, Oil Demand, and CO2 Emissions Through 2050,” Transportation Research Record: Journal of the Transportation Research Board, no. 2038 (2007): 69–77, www.ntl.bts.gov/lib/32000/32100/32149/fulltext.pdf.

  Others still attribute slower: BP p.l.c., BP Energy Outlook: 2017 edition (London: BP, 2017), 73, www.bp.com/content/dam/bp/pdf/energy-economics/energy-outlook-2017/bp-energy-outlook-2017.pdf.

  Speaking to a large audience in Houston: Steven Poruban, “IHS CERAWeek: Al-Naimi ‘Optimistic’ That the World Oil Market Will Rebalance,” Oil & Gas Journal, February 23, 2016, www.ogj.com/articles/2016/02/ihs-ceraweek-al-naimi-optimistic-that-world-oil-market-will-rebalance.html.

  There is no need for “meddling”: Ibid.

  He told a small gaggle of reporters: Stanley Reed, “Saudi Oil Chief Khalid al-Falih Tells OPEC Changes Are Coming,” New York Times, June 2, 2016, www.nytimes.com/2016/06/03/business/energy-environment/opec-meeting-oil-production-saudi-arabia.html?ref=world.

  I
n 1881, readers gobbled up: Henry Demarest Lloyd, “Monopoly on the March,” Atlantic Monthly, March 1881.

  In fact, OPEC later modeled: David F. Prindle, “Railroad Commission,” Texas State Historical Association, June 15, 2010, www.tshaonline.org/handbook/online/articles/mdr01.

  When, near the start of the Great Depression: See Frederic M. Scherer, Industry Structure, Strategy, and Public Policy (New York: HarperCollins, 1996), 67.

  Rampant cheating was so persistent: Lucile Silvey Beard, “The History of the East Texas Oil Field” (master’s thesis, Graduate School of Hardin-Simmons University, Overton, Texas, 1938), 51, www.texasranger.org/E-Books/History_of_the_East_Texas_Oil_Field_(Silvey).pdf.

  The idea of a cartel among them: The leaders of Anglo-Persian Oil (later British Petroleum), Royal Dutch Shell, and Standard Oil (later Exxon) were there that night. Four other large companies later joined their plans. For more, see Anthony Sampson, The Seven Sisters: The Great Oil Companies and the World They Shaped (London: Hodder & Stoughton, 1988).

  From the 1940s until OPEC: Ibid.

  In 1953, they controlled almost 90 percent: The Seven Sisters controlled 87.1 percent of the world’s oil production in 1953. A. F. Alhajji and David Huettner, “OPEC and Other Commodity Cartels: A Comparison,” Energy Policy 28 (2001): 1158.

  When this cohesion has been at its highest: For more on OPEC’s ability to influence the market, see Charles F. Doran, “OPEC Structure and Cohesion: Exploring the Determinants of Cartel Policy,” The Journal of Politics 42, no. 1 (February 1980): 82–101; James Richard, “New Cohesion in OPEC’s Cartel? Pricing and Politics,” Middle East Review of International Affairs 3, no. 2 (June 1999): 18–23, www.rubincenter.org/meria/1999/06/richard.pdf; Nazli Choucri, “OPEC: Calming a Nervous World Oil Market,” Technology Review 83, no. 1 (October 1980), http://web.mit.edu/polisci/nchoucri/publications/articles/D-9_Choucri_OPEC_Calming_Nervous_World_Oil_Market.pdf; Bassam Fattouh, “OPEC Pricing Power: The Need for a New Perspective,” WPM 31, Oxford Institute for Energy Studies, March 2007, https://www.oxfordenergy.org/wpcms/wp-content/uploads/2010/11/WPM31-OPECPricingPowerTheNeedForANewPerspective-BassamFattouh-2007.pdf.

  Ten of OPEC’s members: Benoit Faucon, Nathan Hodge, and Summer Said, “Oil-producing Countries Agree to Cut Output Along with OPEC,” Wall Street Journal, December 10, 2016, www.wsj.com/articles/opec-russia-upbeat-about-securing-oil-output-deal-as-meeting-begins-1481362580.

  in 2016, OPEC countries had only earned: Nayla Razzouk, Angelina Rascouet, and Golnar Motevalli, “OPEC Confounds Skeptics, Agrees to First Oil Cuts in 8 Years,” Bloomberg Markets, November 30, 2016, www.bloomberg.com/news/articles/2016-11-30/opec-said-to-agree-oil-production-cuts-as-saudis-soften-on-iran.

  Oil ministers from Saudi Arabia: See Vladimir Soldatkin, Rania El Gamal, and Alex Lawler, “OPEC, Non-Opec, Agree First Global Oil Pact Since 2001,” Reuters, December 10, 2016, www.reuters.com/article/us-opec-meeting-idUSKBN13Z0J8; Rachael Boothroyd Rojas, “Venezuela Celebrates ‘Historic’ OPEC Deal,” Venezuelanalysis.com, December 1, 2016, https://venezuelanalysis.com/news/12813.

  In the first month of the agreement: In January 2017, the month the agreement came into force, Iran, Libya, and Nigeria brought 270,000 barrels of new oil to market, while other OPEC members cut 840,000. Angelina Rascouet and Julian Lee, “OPEC Cuts Oil Output, But More Work Needed to Fulfill Deal,” Bloomberg Markets, February 2, 2017, www.bloomberg.com/news/articles/2017-02-02/opec-cuts-oil-production-but-more-work-needed-to-fulfill-deal.

  Put succinctly by Abdalla El-Badri: Dan Murtaugh and Javier Blas, “OPEC Unsure How It Can ‘Live Together’ with Shale Oil,” Bloomberg, February 22, 2016, www.bloomberg.com/news/articles/2016-02-22/opec-s-el-badri-doesn-t-know-how-to-live-together-with-shale-oil.

  Rather than quickly curtailing production: In fact, despite the price drop that started in mid-2014, U.S. crude oil production rose, not declined, until April 2015 when it peaked; flush credit markets and effective cost-cutting measures buoyed production despite the falling price. After April 2015, tight oil production began to drop, hitting a bottom in September 2016 after shedding 11 percent of production compared to its 2015 peak. See “U.S. Gas Plant Production of Natural Gas Liquids and Liquid Refinery Gases,” U.S. Energy Information Administration, March 31, 2017, www.eia.gov/dnav/pet/hist/LeafHandler.ashx?n=pet&s=mngfpus2&f=m.

  From September 2016—when rumors: “Drilling Productivity Report,” U.S. Energy Information Administration, June 12, 2017, https://www.eia.gov/petroleum/drilling/#tabs-summary-2; “Drilling Productivity Report,” U.S. Energy Information Administration, September 12, 2016, https://www.eia.gov/petroleum/drilling/archive/2016/09/#tabs-summary-2.

  Technological advances made in the past: For more innovations bringing down the cost of tight oil production, see Clifford Krauss, “Drillers Answer Low Oil Prices with Cost-Saving Innovations,” New York Times, May 11, 2015, https://www.nytimes.com/2015/05/12/business/energy-environment/drillers-answer-low-oil-prices-with-cost-saving-innovations.html?_r=0; Alison Sider and Erin Ailworth, “Oil Companies Tap New Technologies to Lower Production Costs,” Wall Street Journal, September 13, 2015, https://www.wsj.com/articles/oil-companies-tap-new-technologies-to-lower-production-costs-1442197712.

  John B. Hess, the CEO of Hess Corporation: John B. Hess, in-person conversation with author, Washington, DC, December 13, 2016.

  Roger Diwan, an energy market expert: Roger Diwan, in-person conversation with author, Houston, Texas, March 9, 2017.

  In the closing days of 2014, Nick Butler: Nick Butler, “Forget Opec—Sex and Technology Shape the Oil Market Now,” Financial Times, December 21, 2014, http://blogs.ft.com/nick-butler/2014/12/21/forget-opec-sex-and-technology-shape-the-oil-market-now/.

  Experts from former Federal Reserve: In April 2015, ConocoPhillips CEO Ryan Lance discussed the emergence of U.S. drillers as the world’s swing suppliers. Bradley Olson, “Conoco Phillips CEO Bets Farm on Shale, Sees Oil Rebound,” www.bloomberg.com/news/articles/2015-04-08/conocophillips-ceo-bets-farm-on-shale-sees-oil-rebound; Alan Greenspan, “OPEC has Ceded to the US Its Power Over Oil Price,” Financial Times, February 19, 2015, www.ft.com/intl/cms/s/0/92ab80e4-b827-11e4-b6a5-00144feab7de.html#axzz4ATfSa7OO.

  American tight oil has no ability: If the United States wanted to act more like a swing producer, it could consider making dramatic changes to how it uses its Strategic Petroleum Reserve. This is discussed in Chapter Six.

  Those licking their chops: See Gal Luft, “Fifty Years to OPEC: Time to Break the Oil Cartel,” Journal of Energy Security, September 29, 2010, www.ensec.org/index.php?option=com_content&view=article&id=263:fifty-years-to-opec-time-to-break-the-oil-cartel&catid=110:energysecuritycontent&Itemid=366; Nancy Brune, “50 Years Later: OPEC’s Continuing Threat to American Security,” Journal of Energy Security, September 29, 2010, http://ensec.org/index.php?option=com_content&view=article&id=267:50-years-later-opecs-continuing-threat-to-american-security&catid=110:energysecuritycontent&Itemid=366.

  three researchers from Oxford University: Zoheir Ebrahim, Oliver R. Inderwildi, and David A. King, “Macroeconomic Impacts of Oil Price Volatility: Mitigation and Resilience,” Frontiers in Energy 8, no. 1 (2014): 11, www.smithschool.ox.ac.uk/news/FEP-14003-EZ-proof-checked.pdf.

  Surveys of hundreds of senior: John R. Graham, Campbell R. Harvey, and Shiva Rajgopal, “Value Destruction and Financial Reporting Decisions,” Columbia Business School, September 6, 2006, 12, https://www0.gsb.columbia.edu/mygsb/faculty/research/pubfiles/12924/Rajgopal_value.pdf.

  “The big dogs, the Saudis”: Lynn Doan and Dan Murtaugh, “Shale as World’s Swing Producer Signals ‘Jagged’ Oil Future,” Bloomberg, April 20, 2015, www.bloomberg.com/news/articles/2015-04-20/shale-as-world-s-swing-producer-signals-jagged-future-for-oil.

  At a minimum, companies working: It is, however, worth noting that there are many drilled-but-uncompleted (DUC) wells in the United States. After drilling the well, companies decided not to produce the oil in the price environment of the time. As
a result, when prices reach above a certain threshold, these wells can begin to produce oil in very short order.

  Three: Natural Gas Becomes More Like Oil

  An old wildcatters’ joke: This quip is also reproduced in Economist, “Vapour Trails,” Economist, July 1, 2010, www.economist.com/node/16488892.

  Put another way, a barrel of: Calculations were made using: Derek Supple, “Units & Conversions Fact Sheet,” MIT Energy Club, accessed November 5, 2016, http://cngcenter.com/wp-content/uploads/2013/09/UnitsAndConversions.pdf; “US Barrels (Oil) to Liters,” Metric Conversions, November 3, 2016, www.metric-conversions.org/volume/us-oil-barrels-to-liters.htm; “Energy Units and Calculators Explained,” U.S. Energy Information Administration, August 9, 2016, www.eia.gov/energyexplained/index.cfm/index.cfm?page=about_energy_units.

  Compared to oil, the relatively complicated: While cross-border trade in natural gas is clearly the trade relevant for geopolitics, it is important to note that the majority of natural gas consumed is produced domestically.

  Until roughly the year 2000: As can be seen from Figure 3.1, up until 1999, fewer than ten countries were importing LNG. See International Gas Union, IGU World LNG Report: 2017 Edition (Barcelona: International Gas Union, April 2017), 7, http://www.igu.org/sites/default/files/103419-World_IGU_Report_no%20crops.pdf.