John Hofmeister, former President of Shell Oil Company and well respected author of "Why We Hate the Oil Companies: Straight Talk from an Energy Insider" gives us his insider update. What is the impact on oil prices as a result of the recent uprisings throughout the Middle East and North Africa? What are the projections for the future global oil supply and demand? How can we prevent future oil spills? What are the best solutions to our energy consumption? Does your government have the political will to get it done?
It is my pleasure to welcome John Hofmeister and the years of inside industry knowledge that he brings to table.
Gabrielle Reilly: What will be the impact of the current revolutions in the Middle East and North Africa on oil prices?
John Hofmeister: Depending upon how long the turmoil in the Middle East and North Africa continues, the world should expect oil price volatility and ongoing upward pressure on price. The events of a single country like Libya contribute directly to such uncertainty. But even more the combined uncertainty of events across eight or more countries, many of which have oil infrastructure of various types, e.g. pipelines, ship channels, refineries, etc., especially those which have oil and gas production, add collectively to the uncertainty. The fear of contagion and expansion to other oil producing countries, especially in the Persian Gulf, including Iran, Iraq, Kuwait, Oman and Saudi Arabia, add additional caution, concern and upward price pressure on the security of oil supplies. The longer the uncertainty remains, the greater the pressure on oil price, until such time that high prices negatively impact economic growth. Slower economic growth would reduce underlying oil demand which in turn reduces pressure on oil prices.
Gabrielle Reilly: If we were to transition our energy needs away from oil to a new energy source today, how long would you expect it to take to actually convert American cars and infrastructure?
John Hofmeister: A deliberate effort to convert U.S. energy needs away from oil to other sources of energy is a journey of many decades and would require persistence and commitment like the U.S. has never, ever seen in its recent history. The U.S. has spent more than a century building out an oil dependent infrastructure on the assumption that it was the most efficient and reliable infrastructure available. Given the amount of U.S. domestic oil resources, coupled with potential resources available from Canada and Mexico, our immediate neighbors, it actually remains a viable infrastructure to meet America's energy security future, provided the U.S. would increase domestic production by up to three million barrels per day, re-establishing a ten million barrel per day production objective. We use to produce that many barrels for many years as recently as the 1970's and ?80's and actually have the resource base that would support such a level of production for many decades to come. In fact in any transition away from oil we will continue to need more oil for decades. So it is folly not to produce more of our own oil, even while we work on the alternative opportunities that are being developed.
As far as alternative sources are concerned, including natural gas, biofuels, batteries and hydrogen fuel cells for personal mobility, the persistence and commitment to an infrastructure and technology build out would require our political leadership to commit to a set of plans that would extend beyond multiple Congresses and Presidential Administrations. The past forty years has seen anything but such commitment. We have turned energy policy topsy-turvy following every majority party change in Congress and the White House without fail. So having confidence in a multiple Administration and Congressional support for a committed direction would be historic and unprecedented and frankly unlikely under our current governance.
It would take an Act of Congress, supported by a President, to change the governance of energy, which I propose in my book: Why We Hate the Oil Companies: Straight Talk from an Energy Insider (Palgrave Macmillan 2010). Only an independent regulatory commission governance set up, like the Federal Reserve System, except designed for energy, would enable the commitment and persistence of a sustained energy system alternative to be built out over time because the independence from Congress and the White House would enable sustained direction to overcome political forces of the day. Such an independent regulatory commission could be charged with the short, medium and long term strategic management of our energy future in four areas: the future sources of supply, technology for energy efficiency, environmental protection of land, water and air, and interstate and regional infrastructure to bring energy from where it is produced to where it is consumed.
Gabrielle Reilly: How has the global consumption of oil changed in the last decade, in comparison with US consumption? What is your global consumption forecast for the future?
John Hofmeister: Oil consumption worldwide, except for periods of economic recession or slower growth, has continued to increase in recent years overall, including in the U.S. Transportation and expanded use of petrochemical products to make things are the primary reasons. As the global population has more to spend on lifestyle choices in the coming decades we can expect to see continued growth in oil demand for the same two reasons: people want to travel and we want more things made from petrochemicals, ranging from fiber for clothes to pharmaceuticals for health.
Oil demand is expected to rise from 85 million barrels per day over much of the past three years to about 90 million barrels per day by 2012 or 2013. Over the next twenty years experts predict that oil demand could grow to 105 to 110 million barrels per day, or even higher. Oil experts project that there are sufficient oil reserves to serve demand numbers as high as 105 million barrels per day. Beyond that there are disputes among experts as to how much higher production could rise and for how long it could be sustained.
For people who believe the mythology that we are moving to a post-oil age and that oil is more a part of our past than our future that is an unrealistic view for the next twenty to thirty years as the world craves ever more oil. New technologies that replace oil are the best bet for moving past the oil age. I'm confident that we will one day see the decline of oil but it will happen on the basis of preferred alternatives not government mandates.
Gabrielle Reilly: What is the maximum global oil output to date? What do you expect the annual supply and demand differential to be in 2015?
John Hofmeister: 85-86 million barrels per day continues to be the maximum oil production the world has thus far seen. While demand was estimated in the range of 86-88 million barrels per day in 2008, the producing countries were not able to sustain production at that level and thus we saw oil soar to $147 per barrel before the price collapsed due to demand destruction at those prices, coupled with the broader economic meltdown, in part fueled by the high prices of oil.
There are predictions that oil demand will resume its relentless growth in 2011 and 2012, getting to about 90 million barrels per day by 2013. This will pressure oil production around the world and essentially utilize all current inventory and OPEC and non-OPEC production capacity. New sources of oil will be required to expand production beyond this level. By 2015 oil demand may reach closer to 95 million barrels per day. I consider it unlikely however that production will keep up, putting severe price pressure on the global economy. Such price pressure could result in slower economic growth and even economic recession in some countries that can't withstand such high oil prices. The wild card in the future of oil production however could be the U.S. With its ample oil resources, increased domestic U.S. production could be brought on line to both supply future demand growth and simultaneously ameliorate prices, adding to overall global growth. Enabling increased oil production is a crucial political decision for the U.S. government. The current administration is avowedly anti-hydrocarbon and unlikely to support increased domestic oil production. A different government could take a different point of view after 2012 or 2016.
Gabrielle Reilly: What price do you anticipate oil will be at in 2012?
John Hofmeister: If we stay on the current path of restricting and prohibiting increased U.S. production of domestic resources, given the global growth in demand for oil, I've been predicting crude oil price rises that would result in $5.00 per gallon gasoline prices in the U.S. in the latter part of 2012. This would be in the range of $150 dollars or higher for crude oil. Such price rises would inevitably impact the November 2012 elections. A pocketbook issue as significant as high oil prices would be an unavoidable political issue as voters go to the polls at that time. Given the current administration's anti-oil and anti-hydrocarbon policies, it could have a difficult time defending its policies in the face of unprecedented prices for a product that is a basic requirement, at affordable prices, for every American family.
Gabrielle Reilly: If we look at Mother Earth knowing we need oil to get people to work to feed their families, would it be better to get the oil from the wild frontier of the Nigeria Delta where oil spills are almost a daily way of life, or would it be more environmentally friendly to drill in a more regulated country (although of course not perfect) like America?
John Hofmeister: The U.S. has been exporting its oil production risks for decades to countries that tend not to have the same enforcement of regulations that protect the environment as the U.S. It is a form of environmental hypocrisy. It is completely possible to both support extractive industries and hold them accountable for environmental protections at the same time. We create jobs around the world to meet our daily oil requirements while we destroy jobs in the U.S. producing oil for the same purposes as imports. I consider this political hypocrisy.
There is every reason to do our best to hold countries like Nigeria to account for environmental protections. For example we could refuse to purchase their oil until such time as they impose and enforce appropriate environmental protections such as we would expect in this country.
In addition to future alternatives I support increased U.S. domestic production of oil to meet our daily needs in the coming decades. We consume 20 million barrels of oil per day and this demand is likely to continue at this, higher or slightly, lower levels for decades to come. We only produce 7 million barrels. A lift of domestic production to at least 10 million barrels per day would not just be necessary to keep our economy supplied but it would also have the impact of creating up to 3 million new jobs in America. I see nothing but value and economic growth coming from such a shift in oil production policy.
Gabrielle Reilly: What safety measures do you think need to be taken to prevent another oil spill like that experienced in the Gulf?
John Hofmeister: In fact every analysis of the BP disaster points out how the operators on the Deepwater Horizon rig, overseen by BP managers, failed to follow standard safety practices that have worked for over 40 years and 40,000 wells in the Gulf of Mexico over the past decades. A Presidential Panel declared there were systemic safety issues in the Gulf of Mexico which most oil producers find implausible on the basis of the facts. Regardless of the disputed political intentions of the Presidential Panel, no other country in the world drilling offshore stopped operations following on the April 20th disaster. They kept drilling because they declared the operations safe. So too did the Department of the Interior declare the operating permits of the 33 rigs continuing to drill in the deepwater Gulf of Mexico in full force and in full compliance following inspections, until a White House decision was made a month after the disaster, to withdraw all permits of safely operating deepwater rigs. The White House decision was made regardless of the safe operations being conducted by the companies operating in the Gulf.
There is no high risk industry operating in the world today, including aerospace, mining, chemical production, nuclear power production, that could not improve on safety practices and processes for the purpose of reducing risk. It is a responsibility of management of every high risk occupation to do what can reasonably be done to reduce risk. It is part and parcel of learning and applying learning to future work. There comes a point where judgment says the work is needed and should go forward mindful of the risks involved. If judgment did not prevail surgeons would not operate, police would not enforce order, firemen would not expose themselves to putting out fires, snowplow drivers would not plow snow, no oil would be extracted, no coal would be mined. It all comes down to balance and best practices. We've done well in the Gulf of Mexico for the past nearly five decades. The single incident of the Macondo Well is not representative of how the Gulf operators operate. The industry should not have been shut down. Politics ruled the day suggesting to the American people that the industry was unsafe. That message was untrue, as demonstrated by the rest of the world which continued to operate while the U.S. shut down drilling.
There will be changes to operations in the Gulf as a result of the Macondo incident. Such changes should occur and will be embraced by the industry. The issue of contention is not the introduction of new practices, it was the politically driven decision to shut in operations while such changes were being considered. The loss of jobs, wasted expenditures, and many decisions to abandon drilling in the Gulf and the removal of rigs from the Gulf to other parts of the world have weakened the industry in the Gulf of Mexico. When the American economy needs more oil from the Gulf to sustain its growth cycle, Gulf oil production will be in decline due to the decision to shut down drilling operations.
Gabrielle Reilly: When the oil prices were sitting at $20 to $30 a barrel in 2004, I wrote several articles warning that the 70's oil crisis prices were imminent; by 2008 they hit a record breaking high of $147 a barrel. The same conditions that caused me so much alarm then, still lurk in this new world order. The emergence of China and India's oil demand removes OPEC's dependence on America as a consumer and an unprecedented cooperation agreement quietly signed by Saudi Arabia and Russia in Sept 2003 to CO-OPERATE ON OIL PRICES drastically changes the paradigm. Consider, Russia is the largest supplier of oil outside of OPEC causing both a conflict of interest with an OPEC member having a subcontract, and creates a near oil monopoly when they want to play that card. Energy politics are drastically different from previous decades. The oil countries have new customers to buy their oil, a new contract to regulate oil prices, and of course the political will to destabilize the United States. How do you think we should address our future energy policy and what energy sources/technology do you favor?
John Hofmeister: My book Why We Hate the Oil Companies: Straight Talk from an Energy Insider (Palgrave Macmillan 2010) describes my views of the future energy policy the U.S. should adopt. It includes more energy from all sources; more technology to deliver energy efficiency; more environmental protections for land, water and air; and more infrastructure to move energy from where it is produced to where it is consumed. In essence we need to replace the 20th century energy system with a 21st century energy system, utilizing all forms of energy, technology and infrastructure to do so. In the process of doing so I argue that by 2060, beginning now, we could create an essentially carbon free energy system over fifty years, provided we had a sustained and committed effort to do so that was not interrupted by political preferences every two to four years the way we manage things now. All forms of energy by the way includes the following: oil, gas, coal, nuclear, biofuels, wind, solar, hydropower, geothermal and hydrogen. These ten forms of energy in varying degrees of mix can make up a carbon free energy system using technology to capture carbon, where it is produced.