Daniel Yergin on the New Map for Energy

Daniel Yergin, a Pulitzer Prize-winning author and renowned expert in energy and international relations returns to the show to discuss the state of energy markets and his book The New Map: Energy, Climate, and the Clash of Nations. Topics include: surging oil prices, natural gas shortages, China's energy crunch, and more. 

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This video was recorded on September 29, 2021.

Nick Sciple: Welcome to Industry Focus. I'm Nick Sciple. Today, I'm excited to welcome IHS Markit, Vice Chairman, renowned energy expert and Pulitzer Prize-winning author Daniel Yergin back to the podcast. Mr. Yergin last joined us on the podcast roughly a year ago to discuss his most recent book, The New Map, Energy Climate, and the Clash of nations where you sat sport this framework with the energy markets future. Well, a lot has changed in the last year, which is why The New Map is now available in paperback with a new updated epilog and why we're excited to have Mr. Yergin back here with us to share his thoughts on what's happened in the energy industry over the last year. Daniel Yergin, welcome back to Industry Focus.

Daniel Yergin: Thank you, Nick. It's really great to be back with you and your audience.

Sciple: Great to have you here, lots to talk about. I want to pull a quote from your new epilog. You say quote, "Geophysical maps change very slowly, but political, technical, and economic maps can change very quickly revealing new topographies represent multiple challenges and need to be traversed with care and thought." You say, "That's the terrain we're in today." If you look out over the past year or so, what would you say is the biggest change to the map for energy that you've seen.

Yergin: The biggest change in the amount of energy is what happened to prices. A year ago, we're still in the pessimism of the collapse that come with the shutdown of the economy and the turnaround in markets has been expected, but it's come very fast and sadly you're having, I hate to use that cliche, the perfect storm, where you have certainly different things all coming together at the same time to disrupt supplies and send prices up to levels that have big impact on the global economy, and by the way disruptions in the country and then people's lives.

Sciple: Last time we had you on the show, oil prices, West Texas Intermediate, you're looking at around $39 a barrel today, as we record here, right around $75 a barrel, West Texas a year ago you had BP and some other saying, "Hey, peak oil demands might be here. " Now in the past month yet President Biden asking OPEC to increase oil production. How did we get here where there's such a swing and from this, demand has peaked so now demand is so high we need to beg OPEC to produce, what happened?

Yergin: Isn't that quite surprising to have the president actually go into OPEC, even at the time when regulatorily it's putting restrictions on the domestic industry, so raised a lot of eyebrows. But it shows that Joe Biden has been around for a long time in Washington and he knows that high gasoline prices are not good for people who are incumbents in office. What's happened is what you pointed, we've had that recovery in the global economy, even with the variance and the resurgent waves of COVID and the world economy has come back pretty strongly. That means demand has come back pretty strongly. Suddenly you have China importing more than 25 percent more LNG than it did last year and running short of coal, because China is a workshop at the world and specifying the rest of the world. You have the pull-in demand, you have it in Europe, you have in the United States, oil demand is going to continue to grow for the next several years, maybe not evenly, but it will grow and at the same time, you've had a series of disruptions including few a hundred thousand barrels knocked out of the Gulf of Mexico that are still not operational. The gas market so tight. The people are now switching to oil. We calculate maybe 600,000 barrels a day of unexpected new demand for oil and that shows up. Where does it show up? It shows up in price.

Sciple: Who would you say are the winners and losers here as the market plays out? Certainly it's been a great year to be an energy producer, the S&P 500 energy sector really trouncing the overall market, but as you mentioned, supply chain issues, maybe it comes into inflation, when you think about winners and losers. Break that down for us.

Yergin: Well, right now of course, if you're a producer of the commodity oil, natural gas, you're doing much better than you expected in terms of revenues. I think the markets are recognizing that. Obviously, I know India's energy situation very well. India bought 85 percent of its oil, so an increase in oil prices is a really big hit for an economy like India. It's their balance of payments. It hits consumers, it affects consumer sentiment as well as consumer pocket books as these things flow through the system. Some of this, as a result of policies, the Europeans have put pressure to reduce domestic natural gas production within Europe. But gas demand goes up and LNG supplies become tight and that reverberates across the entire economy. Of course, Britain is a special case right now with gasoline stations running out of gasoline because they don't have truck drivers to move the supplies around.

Sciple: What are the other things we talked about last time we had you on the podcast, is not just the oil market, what we're seeing there, but also natural gas. You mentioned the shortages we're seeing in Europe. Another thing we saw was the Biden administration allowing the Nord Stream 2 pipeline to move forward, which in theory would open up lots more natural gas supply to Europe yet we're seeing these huge shortages. What do you think is going on here with Russia and Europe and these natural gas shortage?

Yergin: What's happened is, storage is low in Europe. Storage is low in Russia because they had cold weather earlier in the year and last winter, so the supplies were not replenished. Nord Stream would bring more gas on when it starts operating. I believe it's been finished. That's really a political issue because on the one hand, Biden administration is saying medical forward because they don't want to have a continuing battle with the most important NATO ally in Europe, which is Germany. On the other hand, there's still efforts in Congress to put even more sanctions to try and prevent this pipeline that's finished from supplying natural gas. But right now I think the Europeans would like to see more natural gas flowing into the system. They're having to shutdown factories. Shut down fertilizer factories that need natural gas, and that then reverberates on toward food production in the United Kingdom. There's so many knock-on effects of what happens when you have, whether you call an energy crunch or an energy crisis. If we have a cold winter, we're going to have a difficult time around the world, and it's already at work in China where they were going to back out of coal and now they're really desperate to get more coal into their economy.

Sciple: I think both of these illustrate these tensions between the transition argument we need to reduce fossil fuel emissions globally, but at the same time we need to keep the lights on. For policymakers, how do you navigate these challenges?

Yergin: I think Nick, you've pointed to an issue that is on the table now. In the New Map described this whole how we got to net 0 carbon by 2050 and now this effort to really accelerated to 2030, which has been a drumbeat, and you see so much in the media about it. But it turns out that you got to look at 2021 and 2022 as well. In fact, the world operates even $86 trillion world economy that operates 80 percent on fossil fuels. If you disrupt that in the near term, you're going to have a severe economic effects including helping to embed inflation in the economy. I think for politicians go into this Classico Climate Conference at the beginning of November. Suddenly I think playbooks can change by what's happening now. They've got to focus on the here and now as well down the road.

Sciple: Yes. You've written a few times about this upcoming Glasgow Conference in November. The United Nations Climate Change conferences, as this being an important, I guess, landmark on the climate change roadmap, I suppose. If you want to say the Paris Conference, what was another previous land map? This maybe is the next one. Why is this particular conference so important in your view?

Yergin: Well, there's such a push and the Biden administration is so strong in terms of pushing the agenda. But it's not like Paris. Paris came out with an agreement over 194 nations that said, "Okay, we want to keep temperatures from rising two degrees centigrade more from pre-industrial levels, one-and-a-half degrees." That then became this net 0 carbon, which is companies, countries, 72 percent of global emissions now are under net 0 carbon. But there's the issue to push it forward. But there's not a single thing. I think they'll come out of Glasgow. I think the thing to watch is actually on the finance side. I think you may see some very large pleasures by financial institutions push to commit, shall we say tens and tens of trillions of dollars to climate and sustainability. Then I think the other thing that's happening is this effort to turn financial regulators like the SEC, even the Federal Reserve into climate regulators too. That's new terrain for financial regulators. It's going to be complicated to do that, but expect some pronouncements coming out of Glasgow about that as well. I think those will be two of the biggest things we should watch with the developing countries say, because they may not be on the same page. Because they can't only focus on climate, they have to focus on poverty and economic growth and they have different agendas. I hear from some of the developing countries saying, "Our agenda is not the same as Netherlands. We're not a rich country like Western Europe countries. We need actually more commercial energy to reduce poverty in our country." I've heard that in India, heard that in Nigeria.

Sciple: I'm glad you mentioned developing countries, because you see these headlines whether it's, we're going to have high natural gas prices in the US as winter comes down the pike or there are shortages in Europe or China, you have to believe that there's shortages affecting folks. We don't get all these headlines. What is the status of energy supply and in other places around the world? Should they be expecting similar issues to what we just talked about in Europe and China?

Yergin: I think yes, if global gas prices go up, oil price goes up. It's a global price, so it affects everybody. I think I've answered before for India to it's a problem. If you're developing country and you happen to be an oil export, or this helps your treasury, you're going to have more revenues. But for most developing countries, this is a big hit, and a big hit on economic growth. I think what we have to be worried about is what does this do combine with inflation to end the disruption supply chain for this is due to global growth because up till now, the world economy, despite everything, has been on a very good growth track. But we've seen a lot of inflation that may not be so transitory.

Sciple: Yeah, and fundamentally, energy prices underlie all these things. Cheap natural gas makes all the things you are made with natural gas basis energy that much cheaper, which has been a huge tailwind buying the economy the past 10 years, the rise of Shell, those sorts of things as you see us coming out.

Yergin: Let me just jump into this has been a big, it's now taken for granted. Our policy on the Middle East even are passing Afghanistan is affected by the fact that we're energy independent, US is energy independent now, which seemed impossible a dozen years ago, were energy independent. But the people were saying, we're going to right size our commitment is I heard one senator say to Malaysia wouldn't be saying that if we were still importing 60 percent of our oil. I think taking for granted this turnaround in the energy position of the United States should not be taken for granted. I know other countries around the world. Both friends in the United States and competitors in United States, both looked at the change in the United States energy position is a big plus for the United States. Our friends, countries who import from us. We're exporting energy to South Korea and India, this is a big deal for them. Our competitors like Russia. Don't want to see US Shell do well.

Sciple: But you mentioned US Shell performance. There were some questions coming out of 2020, lots of bankruptcies in the space about, how well can this industry thrive? What do you view as their future coming out of this, particularly you met ESG, lots of folks you don't want to invest in space.

Yergin: You'll have two things about investors and everybody is watching this, or listening to this as an investor. There are two considerations, one of the ESG, environmental, social, and governance issues. The other is returns. Returns haven't been very good being an investor in oil and gas when you have two price collapses. Also during the Shell heyday, two million barrels a day of adding new supply world and never seen that much new oil come into the world that fast. The focus was just that growth. Now it's no longer a growth at any cost. It's growth at what cost. In particular, we talked about the Shell revolution. There's a second Shell revolution, and that's the relationship between the Shell companies, Shell producers and investors. This revolution is called return money to investors. Capital discipline is, you go in the oil patch. That's what you hear is capital discipline because we got to get money back. Now have companies with variable dividends and we never had dividends before, and a focus on returning our capital to investors. I think the Shell industry, if we look at an aggregate, has more than stabilized. You've had consolidation, you've had optimization, you had greater efficiencies, gotten more scale. I think we're back on a growth track. But modest growth track now if oil stayed at $80 a barrel for five years, it might see something different, but I think companies, particularly public companies with shareholders will be cautious with private equity-owned and so forth. For them, this is a big opportunity to step up activity, but I think the public companies they'll respond, but there will be more cautious. Because every you have one word in mind and that's called investors.

Sciple: The gold rush is over. Folks want to get a return on investment. These days. No more promises about how big the industry and get so maybe moving on from oil and gas and other big trends we're seeing the industry landscape is in transportation. You had mentioned the Biden administration is clean energy goals. We also have clean transportation goals calling for 50 percent of all new passenger cars and light vehicles sold by 2030 to be electric. You've just seen the past couple of weeks huge investments from Ford and GM in electric vehicles. How's the map change around electric transportation for Europe?

Yergin: It's quite remarkable, Nick, I have a story in the book about a young electric vehicle enthusiasts having lunch with Elon Musk in 2003. I was telling him about electric airplanes, and Musk says I'm not interested. Then he says, "What about electric cars?" Said, "I actually might be interested in that." A couple of years ago, last said that if that lunch hadn't taken place, there might not be a Tesla today. That's 18 years ago. Look at pretty big turnaround with the automobile makers. But we have about 300 people do research on automobiles. I think the view we have is it more likely about 25 percent of new cars sold in 2030 will be electric. They're three big challenges. Maybe this challenge will be met. One is supply chains. I want to come back to that. Secondly, is the great Internet, what can it take? I mean, it's our electrical system. Third is consumers. Our consumers. How confident are consumers? You're seeing more electric cars and our people see in there neighbor's driveway and they're going to get one or not. I think those are the questions are out there. Obviously, the automobile makers having made this commitment, are going to go all out in terms of promoting electric cars. But the supply chains is what I want to focus on. It's one of the things I spend some time talking about in the New Map. I think that's a very important part of the book that people should look out because what you're doing is creating new supply chains for these net 0 carbon objectives. The supply chain don't exist. The International Energy Agency says that lithium will increase 4,300 percent. Cobalt and nickel, 2500 percent, 60 percent of cobalt comes from the Democratic Republic of Congo. You can have these new supply chains and everybody is rushing in the same direction. By the way, China dominates the new supply chains. Eighty percent of lithium-ion batteries. By the way, 80 percent of solar panels as well. All of that is there. I think the supply chain, and we're talking before in general, there's a problem about supply chains. But I think in the rush to this, again, there's not a precedent for this rapid shift to do it. Everybody is going to be rushing for the same thing. People are saying, "Well, we should open new mines in the United States." I think the last time a new mine opened in the United States was in 1990. Try and get a permit for that. The way I summarize it in the New Map is we're going to move from this era of "Big Oil" and you all know that headline. You hear it all the time to a new era of big shovels. Just one other number to mention. One estimate is that for 1,000 pound electric vehicle battery, you have to move 500,000 pounds of earth. That's a lot of shoveling to do. Think big shovels.

Sciple: Yes. I'm glad you mentioned that "Big Oil" to big shovels transition because I wanted to ask you about that. Obviously, you've done massive amounts of research on the history of the oil industry, development of this industry overtime. This is an industry that went from a supply chain that didn't exist through over the course of a 100 years to basically powering the whole world. Are there any lessons we can learn from oil development and maybe give us some insights into where we may be headed as far as developing the supply chain and these other industries?

Yergin: Well, I hate to say this. I think the lessons and things don't go smoothly. If I think about my book, the price that was it answers. A lot of disruption. I think what complicates it now is while that's all happening, net-zero carbon, there's this other thing happening here, which is the growing estrangement between the United States and China. The rapidly increasing tension between the US and China was, a symbol of it last week was the nuclear submarine deal with US, Britain and Australia. Those nuclear submarines about the South China Sea, which of course China claims as its own and the other says international waterway. I think to me, maybe because of the framework and the way you framed the question is that there will be a new geopolitics of net-zero carbon, and the issue of relationship between the US and China is at the heart of it and all the signs of that relationship is it's going in a negative direction.

Sciple: Yeah. You mentioned China and there was another area I wanted to ask about as well. You mentioned China's coal shortage that comes back to a certain extent to disputes with Australia. They've shutdown Australia coal imports besides into that and four-party alliance you mentioned a second ago.

Yergin: Nick, let me jump in. That's a very good example. Maybe a micro example, not so micro because Australia is a big exporter. But that's exactly an example of geopolitics and energy supplies.

Sciple: For folks who aren't familiar with us, can you give us the back story of what's going on there between Australia and China because I realize maybe everybody isn't following as closely as you and I.

Yergin: China had become very, I would say active in Australia in many different ways. The Australians push back on it in terms of universities and politics and things like that. Then in particular, Australia said, "We need a better understanding of where the corona virus COVID-19 came from in China," and the Chinese took that very badly. The cumulative effect of all of this is that they have banned many imports from Australia, which for Australia, China is a very big market. I think no Australian coal and no Australian wine, [laughs] among many other things, going to China. That's maybe a microcosm of what the risks look like going for the future. On the other hand, US and China may be at loggerheads, geopolitically and on some economic issues too like Huawei and telecommunications, but on the other hand, we're still very connected. Forty-two percent of all containers arriving in the United States at US ports come from China.

Sciple: You mentioned China's impact on solar energy as well and how that's really important to these climate change targets. One of the big pushes from the Biden administration is increasing the amount of solar we use in our current grid. They just put out their solar study from the energy administration, and one of the line items I pulled from there is they're projecting, even under our base-case scenario where's there's no government involvement, they are expecting a 7x increase in solar production or solar deployment on the grid by 2050. But the supply of solar comes from China, how do you think about the speed at which we'll see solar development take place and also just the geopolitical factors that will impact that?

Yergin: I talked about a shovel revolution. There has been a solar revolution too which is a dramatic drop in the cost of solar, like 80 percent or more in the panels. The actual total costs have come down, it's about a 50 percent drop because there are installation costs as well. I think the most renewed electric generating capacity that will be building the United States will either be wind or solar, partly on economic grounds and partly on regulatory grounds because that's where the government policy will push it. So it will grow, but we're still starting from a fairly small base on a global basis. Currently, if fossil fuels are 80 percent of global energy, solar currently is 6/10 of one percent. It's going to grow from a base. I think, like in the Middle East, solar is really cheap. There's a lot of room to put solar in and certainly solar is going to be a huge growth. They'll say that we shouldn't manufacture elsewhere. The Chinese have this manufacturing scale that makes some of the most competitive solars.

Sciple: There's tension you'll hear from installers that if you want to put tariffs on Chinese goods to try to incent US production than you're not going to get the same amount of transition to solar as we'd like. There's lots of puts and takes here. We're getting close to running out of time, so we don't have a ton of where topics to talk about. What's we haven't talked about so far, if you're someone who is paying attention to energy market, it should be on your radar.

Yergin: Hydrogen. I was talking today to a banker who said if we use it hear Hydrogen five years ago, he said, I'd leave the room, there's no point. It's now the hot subject. European Union says that they expect to have 25 percent of their energy come from hydrogen in 2050. We don't have time to talk about the difference between blue hydrogen, green hydrogen, pink hydrogen, gray hydrogen, brown hydrogen. But this is one area where the question, will our natural gas pipelines in 20 years be also hydrogen gas pipelines? That's an area where a lot of effort, and in particular, the Europeans are putting a lot of incentives and pressures to go to hydrogen. But at this point, aside from using hydrogen for making deceleforizing in the refinery and making fertilizer, it's not a business. It's really talking about starting from scratch to create a new hydrogen business. How fast it will be? I don't know. But I will certainly say, if you want to say, what's a hot topic of discussion? It's hydrogen.

Sciple: Well, Mr. Yergin, thank you so much for spending this time with us. Just a reminder for our listeners, the book is The New Map: Energy, Climate, and the Clash of Nations. Always love having you on. I hope we can chat again sometime soon.

Yergin: Thank you very much, Nick. Great talking.

Sciple: 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. Don't buy or sell anything based solely on what you hear. Thanks to Tim Sparks for mixing this show, for Daniel Yergin. I'm Nick Sciple. Thanks for listening and Fool on!