Daniel Yergin on Russia, China, and Global Energy Markets

Daniel Yergin is the vice chairman of S&P Global and the author of "The New Map: Energy, Climate, and the Clash of Nations". He's been studying Russia and China's roles in the global energy markets for decades, and shares the implications of Russia becoming an unreliable oil and gas supplier in Europe. 

In this conversation with Motley Fool senior analyst Ben Ra, Yergin discusses:

• Russia's economic relationship with China.
• The role of shale for U.S. energy independence.
• Supply chain obstacles for wide-spread electric vehicle adoption.

To catch full episodes of all The Motley Fool's free podcasts, check out our podcast center. To get started investing, check out our quick-start guide to investing in stocks. A full transcript follows the video.

This video was recorded on April 3, 2022.

Daniel Yergin: Right in the map is we'll go from an era of big oil to big shovels because you're going to have a lot of mining of minerals at a scale people who barely contemplate to meet these targets, and we're doing a study now on copper. It just looks at what the targets are for electric cars and everything by 2050, and then where's the copper supply to support it? By the way, it takes 16 years to open a mine.

Chris Hill: I'm Chris Hill and that was Pulitzer Prize-winning author Daniel Yergin. You and I may have only recently started paying attention to the global energy markets, but Dan Yergin has been studying them for decades. In addition to his work as an author and analyst, he's advised US president of both major parties on energy policy. Recently, Motley Fool senior analyst, Ben Ra interviewed Yergin about US energy independence, Russia's complicated economic relationship with China, and the critical supply chain problems facing electric car makers.

Ben Ra: [MUSIC] I think we should really dive into the whole Russia-Ukraine question. I was reviewing one of your past books, you've been looking at Russia and the Soviet Union back in the day for a very long time, I think in the '70s you wrote a book called The Shattered Peace, and then you wrote, I think in the early '90s is called Russia 2010, where you imagined the future of Russia at that time, and that future, of course, is our past and our present. If you were to do that for Russia right now, in these crazy circumstances, if you were to look at these various scenarios as you did back in the early '90s, how would you map out the different futures that Russia could take at this moment?

Daniel Yergin: That's a very interesting question because Russia 2010, we had one scenario of a Russian economic miracle like the Japanese and European miracles after World War II, but we had another one called the Russian eagle, two-headed eagle, where it becomes a very repressive authoritarian state again, and of course, that's what we've seen, in fact, on Putin's villa on the Black Sea, he has the two-headed eagle over the door. That's the symbol of the Czars. I guess we'd have to look at a scenario that's a post-Putin one, one in which Russia's economy really grinds down and it becomes an appendage of China. The other is when it does somehow find its way in a post Putin world to reform that it never had. But I think after this crisis in and these massive sanctions. Sanctions are put on more easily than they are taken off. I think the Russian economy is going to suffer for a long time, and I think Western business will not have any enthusiasm at all for engaging with Russia, really trusting it, because, at the end of the day, commerce depends upon trust. One of the fundamental things that the Russians have been selling in terms of energy is we are reliable supplier. Putin said that this week. But I think the Europeans, their major customer, about half of their total oil exports and most of their gas exports, has decided it's not only not a reliable supplier, but it's unwanted supplier. I think it's going to take some time to restore the links and the confidence with the international economy.

Ben Ra: Do you have any scenarios for how this conflict ends? Because at the end of the day, I would imagine a negotiated settlement has to take place. Do you know? Go ahead.

Daniel Yergin: So far, the Russian started this in December with these trees that were totally unacceptable that they've put out there, and then they've had very sham negotiations. It's possible that it does win with Russia gaining control over Ukraine and then having an extended insurgency that continues for quite a long time, and really trying to occupy the country. There are more apocalyptic ways it could end, which are scary. If Russia just grinds down, it's just hard to see. People keep talking about off-ramps for Putin, but it's hard to see an off-ramp that he wants or that he would accept because he has war rallies in Moscow, and he's invested in an insane way and in a crazy way. He's invested his whole future in establishing that Ukraine is not a separate country and it really should be part of Russia. He published an essay last July that when you look back on it, it was really like this declaration of war saying Russians and Ukrainians are one people. What is he doing? He's killing Ukrainians. It's very hard to see he could either reach a pass to stalemate, and there's some settlement. But terms would be so irreconcilable, or he just keeps doubling up this and uses more and more terrible weapons.

Ben Ra: Because there's the Southern ports in Ukraine, Kherson and there's a lot of fighting going on in Mariupol. I'm assuming he wants to go for Odessa. How significant is the capture of those ports? Basically, cut off Ukraine from the sea, and then there's the nuclear plant in Zaporizhzhia. 

Daniel Yergin: There's Mariupol. He's basically trying to strangle Ukraine economically, and between them, Russian-Ukraine export 30 percent of world's wheat exports. There are a lot of follow-on. You can see food prices really skyrocketing in the Middle East because of this, but it's basically, as they say, to burrow constructor, it's to strangle it and prevent its economy from working, and the last thing they'll try and do is choke off the supply lines that come through Poland, and that may be the most dangerous thing he does of all.

Ben Ra: You've argued that we're moving past this OPEC versus non-OPEC world, and we're now in the stage where the big three words, China, the US, and Russia. Is Russia no longer part of your mind?

Daniel Yergin: There's several big threes, but the big three on oil is the United States first, and then Saudi Arabia, and Russia, [inaudible]. Then on gas too, the big three are the US, Russia, and Qatar. But for Russia, it's very important to create this thing called OPEC plus with Saudi Arabia, which was a way of stabilizing the oil market coming out of the two price collapse. The one that began in 2014 and then the one that came with COVID. Both Russia and Saudi Arabia have big investments in that arrangement, and that's the arrangement that's been bringing back 400,000 barrels of oil every month, except it hasn't been bringing back 400,000 because some of the countries don't have the capacity because they haven't invested in development. They haven't invested in maintenance, and so they don't keep paying their 400,000 which is one reason we have a quite a tight oil market right now, even if there wasn't this war going on. But I think that although Putin once said he didn't like the term, has been an energy superpower. No question. It has been sometimes more than 40 percent of his budget, over half of its export earnings. But I think that we've seen a decisive turn. The most important turn was in Germany where the Germany said, we're done. We don't see Russia as a reliable supplier anymore. We don't believe that we need to trade with Russia because it stabilizes a relationship. We want to make a turn toward more LNG exports, more renewable energy, and so I think one of the consequences of this is that Russia is going to be a reduced energy power. It'll still be an important player, but it won't have the same weight that it did before because its gas sales to Europe over five-years will go way down. I think its oil sales will as well. It's now instead of being seen as a reliable supplier, its seen as an unwanted supplier.

Ben Ra: I imagined they're trying to divert or they're trying to make China is now their biggest customer, or they wanted to be their biggest customer, and they have what is it, the power of Siberia pipeline, the first one. I think it was in 2019 that it was completed and then they sign the deal for the new one. How fast can that? Because from what I hear, the fields that are connected to the European pipelines are not connected to the ones that go to China. How fast can that transition over to China?

Daniel Yergin: I think it's not as fast because you do need big, expensive pipelines to take years to construct. But Putin has said that Russia's future is in Asia. In The New Map, I explained a lot or tried to explain this. This Russia-China relationship also in terms of the relationship between Putin and President Xi. They describe each other as best friends. There was one meeting in Central Asia, where it's Xi's birthday and Putin said, "I'm bringing your favorite flavor of Russian ice cream." These guys have met dozens of times, talk all the time, and really have created call it anti-western European, anti-US, anti-west alliance, where they talked about absolute sovereignty, and they reject the international order that basically that Europe and United States have put together and by the way from which China has prospered enormously. I think that out of this likely is that Russia becomes more of an economic dependency of China, and China regards Russia as a source of raw materials.

Ben Ra: A lot of I would say Cold War statesmen or even experts like, I don't know if you've heard Kishore Mahbubani, he was a Singaporean. He was predicting and I think I was predicting as well, that it's inevitable for the US and Russia to get close because there is this China, that's the overwhelming force and we want to balance against China as we wanted to balance with the Soviet Union during the Cold War. Is that still in the cards you think, in the far future?

Daniel Yergin: I think circumstances have changed. Of course, Nixon's opening to China was to balance against the Soviet Union. It worked because remember 1969, people won't remember but China and the Soviet Union actually went to war and they were bitter rivals to claim to be the Vatican for communism, who was a true Rome. But I think that for now at least they're very closely aligned. Either there was hopes at the beginning of the Biden administration to somehow they could pry Russia away from China. But I think that's going to be very hard. The more critical question which will play out during this crisis is how close to China really want to be to Russia? What are the downsides of it? What are the risks of sanctions? What are the risks of tying your international position to at least an economically sinking ship? What we don't know, one of the unanswered question is did Putin at the Olympics tell Xi that he was going to invade Ukraine? Because they signed a statement saying there's no limit to our friendship. Well, that's being tested now and it may have been that Putin winked at Xi but didn't quite say it. But there are also reports that the US provided intelligence to the Chinese to tell them what the Russians were doing. But those are one of those questions we'll never know the answer, whether China was in on the secret. Of course, Putin thought invading Ukraine would be Crimea part two. That he would just walk in and it'll be over in three or four days. One miscalculation on top of the other, and at this point after he's been in power for 22 years there's no one there to tell him he's wrong or give him information that he doesn't want. Putin also looked at the United States. He looked at January 6. He looked at a divided country. Biden looked weak. Europe, Germany they took months to work out a new government and so in all of that he said, "It's an open door, I'll walk in and it will take four or five days. The world will protest and either I will set up a puppet government or what I want to do." He probably said to himself, "is annex Ukraine and make it part of Russia."

Ben Ra: I think we should move on to something slightly happier, which is the possibility of renewable energy becoming dominant in the future. Right now fossil fuels provide I think 80 percent or so of energy consumption. That's been quite steady, I would say over the last 10 years or so. I think in your book you say that in 2050 about 80 percent or so of new cars will be either electric or hydrogen. New energy vehicles, and that about a third of the vehicles on the road are going to be electric or hydrogen. Which means that's still two-thirds of the vehicles out there will be ICE vehicles. Do you think it's even possible for us to get to say 80 percent renewable energy? What's your outlook?

Daniel Yergin: That's one of the things I wrestled with in The New Map. First let me say how remarkable it is about electric cars. I have a story there of young technologists JB Straubel, who suggested to Elon Musk at a launch in Los Angeles in 2003 electric cars. Tesla was an [inaudible], last year it was the seventeenth best-selling car in America, one of their models. All the automakers at our conference we just had the CEO of Ford talking about how they're going all-in with their dividing the company in two-parts. Electric cars is one part and internal combustion engines is the other and all the automakers saying we're going to electric. I think a couple of things; one is even in the IEAs very aggressive net zero scenario, oil and gas still are the significant energy sources. But the renewable part and the alternatives and the technology that are not yet commercial or invented are a growing part. I think that what is really struck me and had become quite preoccupied with is, the supply chains for net zero carbon. Whether it's solar panels 80 percent from China, wind turbines all the things you need for them. By the way, hydrocarbons go into both wind turbines and plastics into solar, but electric cars are 20 percent plastic. But what I write in The New Map is we'll go from an era of big oil to big shovels. Because you're going to have to have a lot of mining of minerals at the scale people can barely contemplate to meet these targets. We're doing a study now on copper, to just look at what the targets are for electric cars and everything by 2050. Then where is the copper supply to support it? By the way it takes 16 years to open a mine. In the US, it takes 20 years to not get a permit. I think there is a supply chain crunch in there that may inhibit this unless they're really major technological breakthroughs. It's interesting the fellow JB Straubel who was a Chief Technology Guide for Tesla for 15 years now, has started a new business to recycle your old cellphone and your old electric car battery and draw the minerals out. Instead of mining from the earth mining in a more strict way from batteries. But I think this is a big consideration, that could be a constraint, Benjamin. Everybody rushes to the same side of the boat at the same time, it can tip.

Ben Ra: What's the significance of US Shale and the US becoming a major producer in both oil and gas in this whole story?

Daniel Yergin: I think it's transformational and I think there's the rhetoric and the activism and everything around it and then there's reality that it took the US from importing 60 percent of its oil to being the world's largest gas producer. Huge economic benefits. Just think about the money stays in the US economy instead of going into a sovereign wealth fund somewhere else in the world, about 10.5, 11 million people work in the oil and gas industry total in the United States. It's a very significant for revenues, government revenues, state revenues but it's also changed the US balance of payments position, be a lot worse. I think we've seen now it's a major geopolitical asset. People didn't pay attention to it, but this year the US will be the largest export of LNG in the world. Without US LNG, Europe would be in a much worse state than it is today and so it's something that's really changed the game, has changed the calculation. It's become an element, an important foundation for a better relationship with India, which imports oil and gas from the United States. I think it's a development whose impact is not really recognized. I was talking to a US senator, I was in a discussion with him and he said US should right size its commitment to the Middle East and I thought whether you agree or not, you can agree, whatever you think. I thought if I raised my hand and said to him, by the way, the only way you can say that is because Shale is reporting 60 percent of our oil, you wouldn't have said it. He would've been shocked because I don't think people put two and two together and realize that it equals five.

Ben Ra: Right now, I think we only import 500,000 barrels a day from Saudi Arabia. I think it's the latest figure that I heard.

Daniel Yergin: On that basis, we export and we import because of the quality of oil and location and stuff like that because of the nature of our refining system as opposed to Shale, but on a net basis we're essentially energy dependent.

Ben Ra: Now the Chinese are the biggest customers for Saudi Arabia. I think they recently talked about making payments in Renminbi, in RMB. What is the significance of that? I think if this was announced 10 years ago it would've been bigger news, made a bigger impact. What's the significance, sir?

Daniel Yergin: I think the significance, well, I talked to my colleagues here and point out that even if it's in Yuan, it still gets referenced back to a dollar price, but I think it's symbolic for the Saudis who is their biggest customer? China. Where is the growth? China. So it's a way of moving closer to China. It's a way of distancing themselves a little bit from the United States and for China it's a big victory because they, like the Russians, want to displace the role of the dollar in the world and even though it's not a convertible currency, this is a symbolic victory of saying that the balance of power is changing in the world economy.

Ben Ra: A lot of people speculate about the power of sanctions, weaponizing the dollar. I think a lot of Europeans have had problems with that, maybe less so now, but a lot of Europeans who had problems with that. China obviously has problems with that. I think even India, has doubts about that. Do you see this episode of massively using sanctions, using the power of the dollar in such a big way, does that in the long term, in any way damage the dominance of the dollar? Will these countries come forward and try somehow to find a way to go around that?

Daniel Yergin: I think, Benjamin, that's a really important question. In the New Map, I quote former US Treasury Secretary, saying be careful about how you use sanctions because eventually, it will somehow get people to try and find alternatives to it. I think what we're seeing now is an extraordinary application of sanctions and their work because the Europeans are all on board if it was just the US, particularly unilateral sanctions can really undercut it. I suspect that the Chinese will set up a research institute in Beijing or Shanghai, somewhere, to study really carefully how these sanctions were applied and how they worked because it will be a message about the strength of the sanctions, and the degree to which they rely on the dollar. I think there will be a further reaction when this is over, probably by Chinese and others to look at how do you disengage, create financial system that doesn't run to the US, so you don't have the power of the dollar. It will also, on the other hand, be a message about other territorial issues or other issues that come up. But to use a phrase from the nuclear age, this is massive retaliation in terms of use of sanctions but, it really does underscore the power of the dollar. As China, an exchange rate overtakes the US later in this decade as the world's largest economy. That will be that continuing question about the primacy of the dollar.

Ben Ra: What about Chinese policies with regard to what they call new energy vehicles they want to make? They obviously want to move away from traditional ICE vehicles. They want to be dominant in this newer platform if you will. How significant is that? How do you see that progressing? What's the impact on the world scale?

Daniel Yergin: I think it's very significant. Of course, we tend to focus on Tesla as the icebreaker, but of course, the Chinese also were going down the same road themselves and they had a minister of technology who is really driving it, a Chinese who had gone overseas and worked for Audi.

Ben Ra: Wang Zhigang, I think was his name.

Daniel Yergin: Exactly. I think they had three reasons for wanting to go EVs. First, oil imports they regard that as a huge problem to be dependent. They import 75 percent of their oil and they go back to the Korean War when the US actually cut off oil supplies to China. So they worry about their supply lines. That's why they worry a lot about the South China Sea. Secondly, I think it's about a combination of urban pollution and climate change, but particularly urban pollution because part of the deal in the urban middle class, is clean up the environment. I think that's the second reason. Then I think the third reason is because they were not going to catch up with the West in terms of internal combustion engine cars, but they saw that they can leapfrog with EVs and compete in the global automobile market. So it was a range of national security, environmental and economic mercantile reasons. I think there's no question where are half of the world's electric cars? They're in China and they can push them into the system in a way more easily than we can in the United States.

Ben Ra: They're killing many birds with one stone.

Daniel Yergin: Yeah. They're achieving a lot of their goals with it. Benjamin, they tend to be a formidable competitor.

Ben Ra: Companies like BYD, I think their technology is pretty up there. There's a lot of US, Charlie Munger, for instance is very optimistic about BYD and I happen to be as well, actually.

Daniel Yergin: Are you as well? Do you like it as much?

Ben Ra: I do like it. They're the only producers that have both the battery technology. They own the battery production, and they have everything else in terms of the EV.

Daniel Yergin: They're battery manufacturers too.

Ben Ra: They started out with them and that's really the key. I'm quite bullish on BYD, and that stock hasn't done as bad as all the others, makes it better.

Daniel Yergin: As you know markets are volatile.

Ben Ra: Absolutely. We're seeing that right now, absolutely. Thank you for this. It's been a fascinating conversation. Thank you for always being ready to talk with the Fool and I hope we can talk with you another time in the future.

Daniel Yergin: I appreciate very much talking to the Fool and to the community of the Fools, so thank you for the invitation. As time keeps changing, we'll come back and pick up the conversation.

Ben Ra: Sounds good. Thanks a lot, Dan. Fool on everyone. 

Chris Hill: As always, people on the program may have interest in the stocks they talk about and The Motley Fool may have formal recommendations for or against, so don't buy or sell stocks based solely on what you hear. I'm Chris Hill, thanks for listening. We'll see you tomorrow.