In this episode of Industry Focus: Energy, Nick Sciple chats with Pulitzer Prize-winning author Daniel Yergin about his latest book The New Map: Energy, Climate, and the Clash of Nations. He explains how the WTO consensus has shaped geopolitics over the past 20, 30 years, and why it has broken down. He talks about the U.S.-China relationship, the rise of the U.S. and Russia in the oil economy, the future of OPEC countries, the switch to alternative fuel and much more.
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This video was recorded on September 17, 2020.
Nick Sciple: Welcome to Industry Focus. I'm Nick Sciple, my very special guest today is Daniel Yergin; once described by The New York Times as America's most influential energy pundit. Mr. Yergin is a Pulitzer Prize-winning author, and a respected authority on energy, international politics, and economics. He's Vice Chairman of IHS Markit, one of the leading information research platforms in the world. He's also a Member of the Council on Foreign Relations, a Senior Trustee of the Brookings Institution, and has served on the Secretary of Energy Advisory Board under the last four Presidential administrations. His latest book is The New Map: Energy, Climate, and the Clash of Nations. Daniel Yergin, thank you so much for joining us on Industry Focus.
Daniel Yergin: Thank you.
Sciple: So, before we dive into the book itself, I want to ask about the title. I really enjoyed reading your book. The title of the book is The New Map, what do you mean by that phrase "the new map?"
Yergin: What I meant is, this new map of energy and geopolitics have come together that we've gone through a series of disruptions geopolitically, energy, and of course, COVID, and kind of what the new world looks like, and to provide a guide through that. So, there are maps in the book, but it's basically, the concept of the maps is also metaphorical about really a framework for thinking about how this new world works and looks.
Sciple: Absolutely. And one of those frameworks you talk about in the book is reaching the end of what you call the WTO consensus on international relations. What is that WTO consensus and how has that shaped geopolitics over the last, say, 20, 30 years?
Yergin: This is a term that really occurred to me to describe what was the view that it was good that China connected with the world economy, good that it connected with the United States; good for China, good for the United States, good for the world, and would go forward. And of course, I used WTO, because when China entered the WTO in 2001 it was the beginning of the supercycle of commodities and things really took off, and you know the growth has been phenomenal. But that's broken down now. And, you know, I'm here in Washington and whether you talk to Democrats or Republicans, they're critical of China, people are now looking at China as a strategic rival, a great power competitor. And the Chinese are looking at it the same way. So, there's this growing cleavage. We see it with TikTok, we see it with Huawei, we see it in terms of the military, we see it in other factors. And this is, you know, you have the two biggest economies in the world that are so interconnected that are now, sort of, also at odds. So, it's really, this is part of this new map, the new geopolitics that will have a big effect on the global economy and on global markets.
Sciple: Indeed, one of these metaphors you used, or kind of frameworks, to discuss this rise of China is this idea of the Thucydides Trap. When you have a new power rising in the world, which historically has led to conflict between the existing hegemon; in this case it would be the United States. How is that Thucydides Trap playing out with respect to United States-China relations today?
Yergin: Well, I think, it is there. China characterizes itself as a rising power. I think the U.S. sees China is trying to disrupt the international order and create its own international order. And China says we're trying to contain them and appeals to Chinese nationalism. There's a great picture in the book of the Chinese leader Xi Jinping, just after he becomes leader, taking his politburo over to a museum to stand in front of the century of humiliation, and saying, the century of humiliation is over, China is now resurgent. And so, there are many examples of this kind of Thucydides Trap, and one of them, of course, that anybody who studies history knows is what happened before the first World War between the British and Germany. And so, if you look at how military postures are changing, you know, we have to be alert to this, and it's going to affect investors. I mean, if you're just changing Hong Kong, what does that do to the investment world?
Sciple: Absolutely. I think one of the key parts of that powder keg between the U.S. and China that you discussed in the book is the South China Sea, and in particular, the Malacca Strait. One thing, I think, was really revealing to this book is the importance of shipping lanes to international geopolitics. Can you talk about the importance of the South China Sea to China and to global trade at large?
Yergin: Right. So, about a third of global trade passes through it. It's probably the most important trading body of water in the world. And you know, we've developed these supply chains and they're so complex and people just take it for granted, or at least did until about a year, a year-and-a-half ago. But China has claimed that the South China Sea actually belongs to it, and that it's actually Chinese territory. And I have the story in the book about the maps that go back to the 1930s that are now, 90 years later, at the center of international contention between the U.S. and China. It's amazing to think it's a century of these maps.
And for China, it's the key waterway for much of their trade and for their oil. China imports 75% of its oil, and a very large part of it passes through that. And they're concerned that -- they call it the Malacca dilemma, that narrow strait of water that leads into the South China Sea -- is the U.S. would block it if there was some confrontation over Taiwan; and there's always a risk of a confrontation over Taiwan. And so, that's one of the reasons China has not only claimed the sea, but they've reclaimed 3,200 acres and have built there, sort of, stationary aircraft carriers in the South China Sea, so. And we are now responding by sending freedom of navigation fleet ships through that. You know, to go back to your basic question, it maybe is not only the most important body of water in terms of world trade, it may also be the most dangerous.
Sciple: Absolutely. It's this place where if there's ever going to be a conflict between the U.S. and China, that appears to be the place where that would occur --
Yergin: And, Nick, I describe in the book several instances where U.S. and Chinese ships came very close to a collision. What happens the day after an actual collision happens? Who calls who?
Sciple: Indeed. I want to move on, we'll come back to China here in a little bit, but I want to talk a little bit now about U.S. shale. This is another changing dynamic in the global energy market. Over the last 10 years U.S. shale production has rocketed the U.S. to become the largest oil producer in the world, as well as becoming a significant player in LNG, Liquefied Natural Gas, how has that affected geopolitics, and the U.S.'s position to negotiate with other countries?
Yergin: The shale revolution has had big economic impacts of the positive nature for our economy. It's had a big impact on U.S. foreign policy and the U.S. position in the world of a positive kind. It's given the U.S. flexibility in the world. We don't have to worry about being dependent on large amounts of imported oil, and it's also enabled us to build new relationships, work closely with the Indian government on energy issues. And I can see the fact that we are exporting oil and gas to them has become a whole new very tangible part of the relationship at the most senior levels. So, there are a lot of benefits from it. And it's interesting, in the U.S. people don't know or they don't take it for granted, but I'll tell you, go to other countries, they see this as very significant and very important.
Sciple: Yeah. One of the other, kind of, frameworks you used in the book to talk about this transition, you describe a transition from what you called, the BRIC era, that's Brazil, Russia, India, and China, to what is now the shale-era. How has that changed the dynamics of the world? What is the distinction between those two eras?
Yergin: Well, I think that's kind of the first decade of the 21st century, when you had the, sort of, supercycle of commodities, you'll remember that, and oil going to $134 or whatever it was. And it was really growth in the emerging markets, led by China, that was the, kind of, dominant motif, you know, almost for the world economy, and certainly for the commodity markets, including oil. And that era really ended too, we had a slowing down of China and the other emerging markets, at the same time, you had the shale. It's an amazing story, because you know the textbook said, shale wasn't possible, and yet a few stubborn people, like, George Mitchell or Mark Papa said, well, we can do something here; and they made it happen. People didn't expect it to happen.
And then it became, actually to use a term normally used with tech, a really big disruptive technology, because we saw growth in U.S. oil production at a speed that had never happened before in the history of the world. And the month before COVID, sort of, shutdown, and what I call in The New Map, created the economic dark age, the U.S. reached 13 million barrels/day, several million barrels/day more than Saudi Arabia and Russia. I mean, that was a really historic achievement. And it was, kind of, stubborn entrepreneurs combined with technology who made it happen.
Sciple: Right. I mean, it really threw out the whole peak oil thesis out the window and was this massive deflationary innovation. Oftentimes we talk about innovation opening up new opportunities, this really dropped prices in the market. What it also did, and you talk about this some in the book, is somewhat changed the nature of relations between the United States and Russia. Russia views the rise of U.S. oil and gas as a threat to its position in the world. Can you expound on what this means for Russia?
Yergin: Sure. Well, I have an anecdote in the book, I don't use the first person but it's me. I was in a meeting and I had the opportunity, and Putin was together, Vladimir Putin with Angela Merkel. So, I had the first question. And the question I was asking Putin is, what are you going to do to diversify your economy, what are you going to do to reform so you're not dependent as excessively as you are on oil? Accidentally I mentioned the word "shale," and he erupted in anger and started shouting at me. And I'll tell you, being shouted at by Vladimir Putin in front of 3,000 people, not a great feeling, not a great experience. But what it told me is that he saw shale as strengthening the U.S. position and weakening Russia's position, because it meant that competitors, for instance, in Europe, countries can buy U.S. LNG as opposed to just buying Russian gas. And so, I think the Russians have come to see shale as an adjunct to U.S. foreign policy.
And of course, it was shale that enabled the U.S., whether what Obama did, what Trump did, what Biden may or may not do about Iran. It gave us the flexibility to deal with Iran that we wouldn't have if we had been importing 60% of our oil. So, I think the Russians say, why are we giving up market share to U.S. oil? But when the price collapsed and Donald Trump became the great broker of restabilizing the market last April, and was calling Putin all the time and calling the King all the time, and calling the Crown Prince all the time and made a deal, I think the Russians, at that point, decided that they better get onboard, because if they didn't, you know, their economy is pretty highly dependent on oil, they'd be in real trouble with oil prices collapsing into negative territory.
Sciple: You bring up this kind of grand deal between Russia, the U.S., OPEC. And we've seen this rise of the so-called OPEC+ over the past couple of years, comprised of OPEC members, plus Russia and some others, in an effort to control global supply. Is this a suggestion that OPEC alone, their era of being able to control the oil market is starting to come to an end?
Yergin: Well, I think it has come to an end. I mean, you know, OPEC is an association of countries who have very different interests, including two countries who are big enemies of each other, Iran and Saudi Arabia. And I think when oil prices collapsed in 2014, it was because the Saudis said, hey, we're not going to cut back and make room for Russia. And the Russians, at that point said, well, we're out of here, we're just going to go with the market. And then lo-and-behold two years later, they came around and created this OPEC+, which involves, both, OPEC countries and a number of non-OPEC countries. But the heart of it is the relationship between Saudi Arabia and Russia, and that came together. And so that relationship is really key.
But the way I see it now is, really, the world oil market is dominated by the big three; U.S., Saudi Arabia, and Russia. And that was what was demonstrated last April, what those three countries decided to do is what really has a decisive impact on the global market.
Sciple: You mentioned this big three, and I want to talk a little about Russia and China as well. This is a partnership that we've seen flourish over the past several years related directly to energy. How is energy driving relations between China and Russia?
Yergin: Nick, that's such an important question. And at a time when we tend to put sanctions on Russia, it just accelerates their getting together. So, about a year-and-a-half ago, I was at a conference and Putin was on the stage with Xi Jinping, the President of China. And Putin apologized to him, I'm sorry we stayed up so late talking, it was four o'clock in the morning China time. Xi Jinping said, oh, that's OK, we always have so much to talk about. I'm sure, partly what they talk about is their problems and their enmity with the United States. But that has become a, I won't go so far as to call it an alliance, but Russia didn't want to sell military weapons to China because they were afraid they would copy it and steal the IP, but now they're doing it because that relationship is so important.
And you know, sometimes when you're writing a book, sometimes you see how things fit together that you don't see day-to-day. So, at the same time that Donald Trump signed the sanctions on this Nord Stream 2 pipeline that is $11 billion, three weeks away from being completed, that brings gas from Russia to Germany, and, sort of, stopped the activity there and put it in suspended animation, Putin and Xi Jinping had this big tripart ceremony where they pulled the switch that started the flow of Russian natural gas to the Power of Siberia pipeline to China. So, that relationship I think has become -- that is a really important relationship. And you know, I find here in Washington people say, well, how can we pull them apart? Well, if we put sanctions on them, they're going to go together. And Putin and Xi Jinping share something else. They're both essentially Presidents for life.
One of the things you think about Putin, actually, it just hit me the other day, if Biden becomes President, he will have been in power and dealt with five different U.S. Presidents. You know, you just sort of -- so, how does the world look to that guy?
Sciple: Yeah. So, this is the question I've had, it's not on my notes, but since you mentioned the president for life thing, I'll ask it now. Why are there so many countries that are oil-dominated economies, why do they tend to be ruled by more autocratic governments?
Yergin: Well, I think some of them, it's because it goes back to the Kings who set it up. I mean, you can go to, well, we're democratic, we're the largest producer and we have a democratic government. And you know, we can look at Norway, you know, we can find countries. But even if you look at Venezuela, it did have a democracy and now it's turned into one of the worst autocracies in the world that's imposing such pain on its people. I suppose one thing is, when there's a lot of oil money there, there's what they call "rent-seeking behavior" where people want to get their hands on the oil money. And that maybe leads to the grab for power. But there are probably more autocratic major oil exporters than democratic major oil exporters.
Sciple: Yeah, I don't know why it ended up that way, but that's something I've always wondered about. It seems to be a disproportionate representation there. Moving on, I want to talk about the energy transition, this is a buzzword that has really come to the fore the past several years. However, you mentioned in the book, there's a lack of consensus about what energy transition really looks like, what's your view on what a potential energy transition might look like and what factors might drive that transition?
Yergin: Certainly, an energy transition is happening, it means an evolution of our energy system, and maybe you can say it's been happening. I mean shale was part of a transition. But generally, people think of it as a transition to renewable energy resources and away from the fossil fuels that currently supply 84% of world energy, 84%. And this question of timing, there's some who think, oh, we can do this by 2030. The Europeans and others are setting targets for 2050. I think it's something that's going to unfold over a long time. It's going to need more technology than we have today. And one important part of that technology will be carbon capture, because we're going to need oil and natural gas for a long time. Even if by 2050 a third of cars are electric vehicles, we'd still be using gasoline. So, I think there are a lot of targets out there. How to achieve them? We're not going to do it with the current technology, but we're going to certainly move directionally in that direction.
Sciple: Sure. We've got, in the past week or so, BP came out with these projections that oil demand may have already peaked. This comes, kind of, in contrast to a decade ago, the peak oil supply thesis, the fact that we're out of supply, and now the narrative has switched to peak oil demand. What's your opinion on this idea that oil demand may have already peaked?
Yergin: Well, I think that probably BP people do very serious analysis, others who do serious analysis, think otherwise. I think we at IHS Markit look at it, I think, differently. I think that they may be looking at it saying that the impact of COVID is going to be so great with people really working at home now that the office of the future will also be at home, that there'll be less commuting and less jet travel and so forth. And I think that's probably what they're looking at. But I think the real question that will determine it is what happens to GDP when this is over? Are we going to have a feeble GDP and still have deep economic wounds because of let's look what's happened to small business or will we have a rebound? It's interesting, in China, it looks like they're having a pretty quick rebound. But of course, it's a different society at a different stage in how they've managed to control the pandemic.
I would still think, the feeling, at least, I expressed and the reasons I lay out in The New Map, is I still think it's probably more likely the early 2030s that we see a peak, a plateau, and then beginning of a decline, rather than having it happen sooner. But as I said, it depends on the economies and it'll depend upon government policies. The Europeans are coming down really hard on the automobile companies to change their fleets. But you know, cars don't turnover overnight. The average car in America stays on the road for 12 years. So, I think it's a longer process and that we're really going to have a more mixed system of energy in the future.
And, Nick, If I can just say, I mean, you have to look where we're starting, the U.S. gets 80% of its energy, the U.S. alone from fossil fuels, and less than 4% from wind and solar. So, you know, you don't make that shift in an economy that's a $20 trillion economy or a $87 trillion world economy, you don't do that in a matter of 5 or 10 years, it's just too big.
Sciple: Absolutely. And one thing you mention in the book is that, this won't be the first energy transition that the world has seen. We've seen transitions from wood to coal in the past and other types of fuels. What does history tell us about what the pace of an energy transition might actually look like?
Yergin: Well, history says they take a long time. Although people started using coal to replace wood in the Middle Ages in Britain because of the price, classic economic, short supply, price went up. But I said, actually, that the first energy transition, the key moment was 1709 when a metal worker in Britain named Abraham Darby figured out how to use coal to make better iron than using wood. It took two centuries from then until coal became half of world energy supply. Oil was discovered in the United States in 1859, it wasn't until the 1960s that oil became the No. 1 energy source in the world.
So, the message is, it takes a long time. The reply to that, somebody might say, well, this is not the 19th century, folks, this is the 21st century, we have the technology, we have the money, we have the will power, we have the ingenuity. And I think that's all true. But even look at wind and solar, modern wind and solar are technologies that are 50 years old, 50 years old! So, it was only 10 years ago that they really started to become economically competitive.
So, I think some things can happen fast. Look what digitalization has done. I mean, if we had this pandemic 10 years ago, we probably wouldn't be able to do what we're doing today. So, some things can happen fast and this has been accelerated. But generally, I think that to turn an $87 trillion economy, lessons of history do say that it's complex, you don't just say it and make it happen. And a lot of it will depend upon new technologies.
Sciple: Indeed. We're turning over an entire global supply chain. Obviously, tech drives the market today. But if the energy infrastructure isn't there, then that's the foundation on which our global economy --
Yergin: You need something called electricity.
Sciple: Right. Exactly. That's the fundamental building block on which a lot of these technologies are built. So, a lot of the narrative that we see today around energy transition is really focused around the U.S., Western Europe, a lot of these developed nations. But one issue I'm really glad you brought up in your book is, what does energy transition look like for the developing world? How is that different from what we're going to see here in the U.S. or in Western Europe, more developed economies?
Yergin: Well, I really felt it's very important to include that in The New Map, because it tends to be, you know, the European perspective is, you're a really rich country and you can, kind of -- you have a lot of options and you don't have a lot of really poor people. But the work I do in India takes you in front of the fact that they have hundreds and hundreds of millions of people who live in poverty, who live in villages, who burn wood, animal waste, agricultural waste for cooking. And the World Health Organization, which now, of course, is famous, says that indoor air pollution is the single biggest environmental health problem in the world, No. 1. And so for India, it's a question of how to get people out of the pre- ... you know, get them out of the Middle Ages basically. And for them that means, getting them into a world of commercial energy, and so natural gas. And India has a $60 billion plan to build up its natural gas distribution, get canisters of propane to people so they can cook with that rather than cooking with the waste product with all the health problems. So, I think a country like India looks at this energy transition in a very different way. And for them, it's partly a transition from waste and wood to modern energy.
China is interesting, because China does everything at the same time. It has about half the solar capacity in the world, half the wind capacity, but it's also building three new coal-fired plants a month. So, it's doing all of the above. And I have a quote in the book from the Nigerian petroleum minister, he was saying that, it's all great for these Europeans to tell us what to do, but we have a lot of poor people and we have to get natural gas to them to improve the quality of life. So, I think there really is a difference in viewpoint between, let's say, the Netherlands and Germany, versus India and Nigeria and other developing countries.
Sciple: So, one question I think about when we look at the energy transition for developing countries is when we look at the internet, you can look at China. And they, kind of, skipped the desktop internet and went straight to mobile internet. Do you think there's potential for some of these developing countries to maybe skip some of the hydrocarbon economy and jump straight to renewables, or is that cost prohibitive, what are your thoughts there?
Yergin: Well, I think that they need distribution systems to be able to -- you know, people talk about microgrids and other things and solar. But I think that's a very good question, I think it's limited. I mean, it depends what kind of cars they will go for, more efficient cars. But the problem with having an electric car in a country where the electricity is off for several hours a day, it's not so helpful. You need to be able to have reliable supplies. So, will they be able to leapfrog? I think we'll see. I mean, India is going to put in wind and solar, so that will be part of it. In fact, the original Indian wind company got started to provide power to factories that were being cutoff because there wasn't enough power from the central generating authority. A reflection on the question is, can you, kind of, skip the landline, so to speak?
Sciple: Right. It'll be interesting to see how that plays out. In any event, in a world where there are these narratives about peak oil demand, more moves toward electric vehicles and that sort of thing, what is the future for oil dependent nations in the Middle East, like Saudi Arabia, Iraq, Iran?
Yergin: Well, they are highly dependent, like, 95% of the Iraqi government revenues come from oil. And the Saudi economy is heavily dependent on oil. So, I have one story about a country that has diversified, and that's Abu Dhabi, which, you know, 20 years ago was basically GDP equals oil. Today 60% of its GDP is non-oil. But they set out in a very concerted way to diversify, they also built up what is probably the second-largest sovereign wealth fund in the world. So, they're a big factor in global financial markets and a big player in that. But they're a small country and they set out in a determined way.
I think it's a challenge Saudi Arabia now has, its Vision 2030, which was to diversify. I think you'd find it's pretty hard to diversify a large economy that's dependent on oil, because you have to worry about ability to do business, the role of entrepreneurs, sanctity of contracts and all of those kinds of things, and the sense of time as well. It was hard before, I think it's harder now in COVID; it's a lot harder in COVID. And I think that one thing that has been discovered is that if you want to diversify your economy away from oil, actually it helps to have a lot of oil revenues.
Sciple: Right. It's the chicken and egg, right? You need the money to invest.
Yergin: Right.
Sciple: So, one question I have too is on the peak oil demand and this trend toward, you know, BP is another example. Companies that are investing fewer dollars in exploration and production activities, that's particularly pronounced in Europe, but you're seeing other companies move that way as well. What impact do you think that might have on oil prices? Because I can see two scenarios. Demand trends down over time, which reduces demand for oil and keeps prices low. However, if we don't invest cash in building new supply, it's possible that we reach an undersupply situation.
Yergin: Well, right, and then prices go up and that affects demand too. So, it's really striking to look at what the company is -- basically, they've been in survival mode, for them, as other industries, this is a COVID crisis. And so, the large independents, have on average cut their budgets by 50% or more from where they were at the beginning of the year. The majors by 30%. And you just see one company after another cutting its budget. So, if the past is a guide, that means that if we have a decent economic recovery, demand goes up, markets will be tight, you know, 2023-2024, because you haven't made the investment in 2020 or 2021. But for now, it's all about survival and preserving cash for these companies, so they have to deal with the here and now.
Sciple: So, transitioning, you mentioned earlier some of the new technologies you talk about in the book, electric vehicles. There's really a triad of technologies you bring up in the book. So, electric vehicles, autonomous driving, and ride-hailing and how they might impact energy demand. Why are these technologies so important to the future of energy?
Yergin: Well, I think sometimes people think that oil is just about cars and transportation, it isn't, it's a lot of other things as well. But certainly, transportation is very much at the center of it. And so, I have three chapters in the section I call, Roadmap to the Future. No, I guess it's four. Where I looked at, first, where did the EV come from? Now, this wonderful photograph of Thomas Edison standing next to his electric car around 1900 and Elon Musk standing next to his electric car today. And you sort of wonder if Elon Musk is the reincarnation of Thomas Edison, because Thomas Edison's electric car just didn't get going. And obviously, electric cars have gotten going, and the automobile makers, so.
And then the second one is about where did ride-hailing come from? And a wonderful story about Uber that it started with a guy standing on a street corner being late for his date and he just couldn't get a taxi and there had to be another way to do this. And then autonomous vehicles, self-driving cars.
And so, if you put them together, you would say, I call it the new triad, that you would get, sort of, what I call new companies, which we'll be talking about auto-tech, where software companies, giants would come together with transportation. And I even, sort of, speculate we'd instead of talking about big oil, we'd talk about big mobility. That would be the future.
But I think the disruptors, i.e., ride-hailing have been disruptive. And as I understand, the drive for autonomous vehicles has been set back a couple of years again by the lack of access to resources and investment. But it's possible that we could see, and this would obviously change it, if people really give up on owning personal cars and you just have self-driving cars that show up when you want them, and you feel comfortable getting in them -- which you won't while we're still worrying about COVID -- that the business model for the automobile industry, which really hasn't changed since Henry Ford's Model T rolled off the assembly line in the first decade of the 20th century. You know, then it could be a big change in a different kind of industry. So, you know, it's interesting to think about this new giant industry group that doesn't yet exist called big mobility.
Sciple: Absolutely. And these questions of what role will traditional automakers play in this new dynamic? What role will technology companies play? Do you have an opinion on what that looks like and what companies are left behind and which ones drive the future?
Yergin: Well, not yet, but I'll tell you what I do have, I just have a list, it's like a litany of mergers, partnerships, who's buying who, and how do you do it. And I interviewed both, I talked to, both, Mary Barra, from General Motors, and Bill Ford for the book. And I was struck by what Mary Barra said when she bought this company called Cruise Automation. The challenge is, how to give it the benefits of what GM could bring to bear, but on the other hand, not hug it to close so that you can continue to innovate within that company. So, if you make a list of who's become partners with who, who's bought who, who's working with who, it's quite a crisscross of everybody trying to be positioned for a future that you can't quite put your finger on.
Sciple: Yeah, it's amazing the number of partnerships we've seen in that space over the next couple of years. As you mentioned, folks in the industry have realized the amount of capital they'll need and have partnered up to try to make that possible. One thing you discuss in the book, and this comes back to the pace of energy transition, is what's driving this transition to electric vehicles. So, in your opinion, to what extent is electric vehicle adoption being driven by government action versus consumer demand?
Yergin: Well, I think at this point there may be three elements. One is brand, Tesla is a brand, you know, people want to own a Tesla. It has a lot of significance for people. In general, we haven't seen a large consumer pickup. I think government policy is a really big driver, on the one hand putting more and more pressure on cars, internal combustion engines, in terms of fuel economy. The Europeans will have billions and billions of dollars of penalties that they're going to put on automakers, if they don't change their fleet. And, of course, when I talk to people about electric cars, incentives, you know the tax credit and the other incentives you get make it attractive to do it.
So, I think broadly, at least at this point, I don't see the consumer demand there. I see government policy being a big driver of it, except I think Tesla is a unique example of a creation of a brand by an amazing entrepreneur.
Sciple: Yeah. I mean, Tesla really put the EV on the map. I think you have a quote in the book from JB Straubel, who is the Chief Technology Officer at Tesla for a number of years, where he said, you know, when we were starting this up, we were just making it because electric cars were cool, and then now there's been all this push because Tesla has popularized the electric car. But the potential for this technology to really make a significant dent in the global auto industry is pretty impressive.
Yergin: Yeah, JB Straubel, I mean, basically, I think he said he sort of made an electric, sort of, golf cart when he was a kid. I mean, he was just obsessed with electricity. And the story he told me is that he met with -- and it was somebody else initially, with Elon Musk to talk about an electric airplane. And he said I'm not interested in that, and they said, oh! And then JB said, well, I'll talk about what I'm interested in is electric cars. And then Tesla [Elon Musk] said, I might be interested in that, but it was an amazing job of not only technology, but willpower to make it happen. And he describes just how hard innovating it was. And, you know, probably it couldn't have been done anywhere other than Silicon Valley, in that ecosystem.
Sciple: Next to electric vehicles, one other technology in the arena of clean transportation that's really surged in interest over the past year or so has been hydrogen fuel cells. The role of hydrogen in our energy infrastructure. This isn't a chapter in the book, but you do spend some time discussing it. What role do you think hydrogen could play in the future of our energy infrastructure?
Yergin: Well, I think it's 10 or 12 years ago, maybe a little more before that, there was all this hydrogen highway and everybody was excited about it, then it ended up the hydrogen highway went nowhere. And even four years ago, if you had said, "hydrogen," people would say, oh, yeah, we've been there, done that. But I think now with the, sort of, post-Paris Climate Agreement, hydrogen has really come back into the fore. And I think large companies as well as entrepreneurs are really working on it, saying, I mean, it's possible fuel cells for cars, but also for heating and, kind of, replacing natural gas.
And I think the major oil companies are looking really hard at hydrogen, and of course, the skillset -- that they work with hydrogen already in refineries, so, you know, to turn it into, at scale, a fuel source, I think it's on the agenda. And I say that hydrogen could end up being 10% or more of our energy supply, and that's something that was just sort of sitting over there on the sidelines.
Sciple: You mentioned the role of traditional oil producers, how they have some expertise in the hydrogen arena, they could perhaps make some investments in that space. As you look at oil companies more broadly, as oil demand is expected to fall over the coming decades, what do you see is the future for those businesses, can they pivot to new operations to be sustainable in the future?
Yergin: Well, I think even if oil demand just stays flat, you're going to need $20 trillion of investment, because you have to continue to replace the resources. So, even if it peaks out demand, it's going to continue to be a very big business. So, I think that business is going to be there, but I think you have the various companies taking different strategies to saying, OK, well, we now live in the age of energy transition, how do we play in that, what are we going to do? And you have the European energy companies, oil and gas companies, who are saying, well, actually we're now energy companies, we're going into electricity. I see all of the -- it's interesting for me -- all the large companies are very interested in start-ups, in venture capital investing, in early technologies that may be connected to their businesses or may not. So, there's a sense of, you know, whatever the future is, we want to participate in it.
But I think that different companies are going through different processes, but meanwhile the numbers, in terms of meeting the needs of the market, you need a lot of oil and natural gas.
Sciple: What role do you think access to capital is playing in these companies transitioning more to becoming energy companies, moving more toward renewable? And how much is ESG [Environmental, Social, and Corporate Governance] investing, that trend, driving that for these companies?
Yergin: Well, I think that ESG is quite different than it was two or three years ago. And I think it weighs very heavily on these companies. And you can see that their share prices are down, their share of the stock market is down. And so, I think they have to think hard about that, because I think they have to sort out, how much is that down is because we've termed to have been bad over the last several years and how much is ESG? But I think all companies are seeing that they have to deal with ESG.
We've created -- our company, IHS Markit -- what we call an ESG reporting repository to help companies systematize their reporting, because they ask for ESG reporting from all different sorts. But that relationship with investors, whether you're shale, whether you're a large oil company, is now, there's definitely, ESG is definitely part of that.
Sciple: Yeah. So, I'll ask you a question here. You know, we're in the situation where we need to invest more money in exploration and production to be able to meet demand as our existing supplies dissipate over time. However, the rise of ESG investing is limiting access to capital for companies who are doing those types of operations. If you were running an oil and gas company today, what would be your approach to navigate these obstacles?
Yergin: You know, there's not a single, if I can say that, a single map to do that. But you have to really be -- I think what is important is, return of capital to investors. I think that's the cul-de-sac that many shale producers ran into that it was just growth at any cost, rather than growth at what cost. So, I think that's part of it, is to make sure that there is a return to investors. And then I think you have to demonstrate what are you doing, what are you doing about methane, what are you doing about water, how is ESG criteria? And so you have these sustainability reports now that these companies put out to show that, for instance, in an oilfield, are you using electricity from diesel, are you using electricity from solar to power your equipment? I mean, so those will be the kind of nitty-gritty. So, I think all companies are having to orient toward that to one degree or another.
Sciple: So, as we kind of conclude here, the coronavirus has really thrown a wrench in the whole economy, the energy market is not the least of which. How has coronavirus changed the map for energy and geopolitics?
Yergin: Well, I think it's demonstrated that we're in a more fragmented world, a more disruptive world. The fact that we haven't had international collaboration to really address this is, if you think about it, is really very unfortunate, it's made it much more difficult. And I think it's a symptom of this, kind of, breakdown in, call it, globalization, and it's accentuated. And of course, it's accentuated the tensions between the U.S. and China.
I think another factor that people aren't thinking about so much is, just what are going to be the impacts of these staggering levels of debt that governments have taken on to deal with this crisis? And how is that going to constrain what governments do in the future? And then, of course, COVID, how has it changed how we operate? You know, I have a line in the book, imagine putting out newspapers with almost nobody in the newsroom. I mean, just the impact of digitalization; and that's going to be a lasting impact that's just going to continue.
You know, a lot of new technologies come out of war. In a sense digitalization was here, but it's been so accelerated by this crisis, and you can see it in the value of the relative stocks that you talk about, you know, what's hot and what's not hot. And a lot of businesses will have to worry about whether they're going to be disintermediated by this, including the exercise industry.
Sciple: Indeed. One of the questions that I think a lot of people have asked with coronavirus, there's been a significant amount of government stimulus around the world, and there's been a push for, OK, we need to jump-start the economy after coronavirus, should we be investing large amounts of dollars in this energy transition. Do you think the coronavirus disruption ends up being an accelerant to energy transition or not?
Yergin: Well, you know, that's a really big question. Does it speed the transition or does it slow it? I mean, people say, we'll build back better. But then I say, well, what is it exactly you're going to invest in? I mean, charging stations, yes. What is it? But you know, what are you going to do about small businesses that are still hanging by a thread. So, we hear build back better, but I'd like to, sort of, parse down underneath the rhetoric to say, well, what does it really mean? Does it mean low-cost loans to build wind turbines? What is it? Is it going to be more heavily incentivized electric car purchases? What does it mean when you get down to the details?
And I say in the conclusion that I think there will be a clash between environment ministers and finance ministers. That environment ministers will be wanting to push the transition, and finance ministers will be saying, what's the fastest thing to get our economy back working again, to get people working again?
Sciple: One last thing before we wrap up. We opened up the show early on talking about how the rise of the U.S. shale changed the U.S.'s position from a geopolitical point-of-view with regard to energy. With the coronavirus, shale was already having some issues with access to capital, but with the effects of coronavirus on energy prices and access to capital in that industry, there is some debate about how robust U.S. oil production could be going forward from shale. What's your expectation about what the long-term future is of shale production in the U.S.?
Yergin: So, in that aspect of the map, I have a pretty clear view of the map; I mean, events could show me wrong. But I think that the U.S. reached its high point at 13 million barrels/day in February just before we shut down the economy. I think at the end of the year, it would be between 10 million barrels/day and 10.5 million barrels/day. And kind of in that area going into 2021. And maybe a year from now, we'll start to see response to the market's access to capital, production starting to increase, but I don't think we're going to go back to that buoyant growth that we saw; I think that's history. I think once we get back, we'll be kind of modest growth.
But I think that the difference is that shale, and the story of The New Map is this incredibly disruptive technology, it's not disruptive anymore, it's here, it will stay here, it will be an important part of the market. And the U.S. will remain among the big three in producers, whether it will be No. 1, No. 2 or No. 3, time will tell. But when growth comes back, it will be at a much more modest level.
Sciple: Absolutely. So, at the end of the day, the U.S. will have a seat at the table even if it's not at the head of the table in the future years.
Yergin: Right, exactly, yeah.
Sciple: Okay. So, last question for you. What's your biggest question about the future of energy today?
Yergin: Well, I mean, I probably have so many questions there. I suppose it is, in fact, how this energy transition actually plays out, the timing of it, and what technological surprises will come along or what surprises? You know, I've always been fascinated by who saw the financial crisis of 2008, who saw COVID, what are the surprises here that would disrupt it? I guess I also worry about the geopolitical side of it, that this more fragmented world, I think is a more dangerous world. So, that's something on my mind too.
But I'm a believer in technology and I'm an optimist, and I think the U.S. is extremely well-positioned to be at the forefront in terms of creativity, in terms of addressing these questions.
Sciple: Absolutely. Well, Mr. Yergin, thank you so much for taking the time with us today.
Yergin: Thank you.
Sciple: Just a reminder to all the listeners, the book is, The New Map: Energy, Climate, and the Clash of Nations. If you want to get up-to-speed on what's going on in energy markets today, I think you could do a lot worse than reading Mr. Yergin's book, and getting a picture of the nature of energy today.
Yergin: Thank you.
Sciple: All right. As always, people on the program may own companies discussed on the show, and The Motley Fool may have formal recommendations for or against the stocks discussed, so don't buy or sell anything based solely on what you hear.
Thanks to Tim Sparks for mixing the show. For Daniel Yergin, I'm Nick Sciple, thanks for listening and Fool on!
