If you haven’t read “The New Map: Energy, Climate, and the Clash of Nations,” the most recent non-fiction best seller written by S&P Global Vice Chairman Dan Yergin, you really should. Those who read it now for the first time will no doubt marvel at the author’s prescience and his seeming foreknowledge of global events surrounding Russia, Ukraine and the geopolitics of oil and natural gas.
Having recently read it for a second time, I jumped at the chance to interview Yergin when it arose recently. Though I managed to get my time zones mixed up and was 7 minutes late signing onto our Zoom call, the author of previous oil-focused best sellers “The Prize: The Epic Quest For Oil, Money And Power,” and “The Quest: Energy, Security And The Remaking Of The Modern World” was gracious and generous with his time in what ended up being a wide-ranging interview focused on the current geopolitical landscape.
I had intended to construct a narrative around the discussion, but as it typical of Mr. Yergin, his answers formed the narrative without a need for embellishment.
Yergin makes several key points during the course of our conversation that everyone should take particular note of:
- “The prices we are seeing now are the results of several years of decisions and non-decisions. This didn’t happen overnight.”
- “We were in a global energy crisis well before Russia invaded Ukraine. It started last Autumn.”
- The Biden Administration doesn’t have many tools available to address rising oil and gasoline prices, but one that would be useful would be to engage in “jawboning investors to give companies more latitude to increase production. That would be something important – it would be a useful message right now.” Unfortunately, it’s a tool Yergin does not expect the administration to use.
- Yergin is concerned that the President and his advisors are so worried about high energy costs that they will pursue what he calls “panicky policies,” like a ban on petroleum exports.
- Vladimir Putin severely “miscalculated” in thinking he could quickly replace the Zelenskyy government in Ukraine in a few days, and “he never expected the extent of the Western sanctions and the unity behind them.”
- Governments in Europe “now regard U.S. LNG as a strategic asset for Europe. They’re depending upon it.”
- “So, again, we talk about the potential for panicky policies: If limits were put on LNG exports, it would be a terrible shock to Western unity and Europe’s ability to stay the course.”
There is much more in the full transcript of our interview, which follows below.
Q: As we talk today, the Brent price for crude oil is $121, West Texas Intermediate is at $120 and the regular gasoline price is about to top $5 per gallon in the U.S. for the first time. Where do you see things going from here?
Yergin: “All the signs point upward for oil markets. The opportunity for new supplies to come into the market internationally is dimming. While there’s a lot of discussion about spare capacity in two countries – Saudi Arabia and the United Arab Emirates – these are not big numbers. I think that gets overlooked in the discussion. There’s not a spigot to turn on that’s going to come pouring out oil.
“The likelihood that there will be new Iranian oil coming onto the market is increasingly unlikely, and Russian oil is going to be constrained. Then, on top of that, you have China opening up again and demand strengthening.
“The prices we are seeing now are the results of several years of decisions and non-decisions. This didn’t happen overnight.
“We were in a global energy crisis well before Russia invaded Ukraine. It started last Autumn. It wasn’t as evident in the United States, but it was sure evident in Europe and Asia. Now, reality has set in when it comes to energy, and it’s going to be an expensive summer.”
Q: What about potential demand destruction? Are you seeing signs of that happening now?
Yergin: “There were some signs over Memorial Day that gas demand was slightly lower than it had been in 2019. Inevitably, there will be some demand destruction that would happen at these prices, but consumer spending is still strong in the U.S. Where you do see it is in terms of the hot item to buy now is an electric car. But you’re talking about very small numbers in terms of having an impact on oil demand.
“And whatever demand destruction you have in the U.S. will be more than counterbalanced by a recovery in China.”
Q: Many believe that a growing shortage of domestic refining capacity has been a driver of rising gas and diesel prices. If that is the case, what can be done to correct the situation?
Yergin: “There isn’t much. A lot of refineries have been closed in the West. And I think most people haven’t thought about it this way, but as there is a global oil market, there is also a global refined products market. It’s a separate market, and Russia is a very integral part of that, providing diesel to Europe, and then Europe providing gasoline to North America.
“That system, partly because of the war and other restrictions, has tightened up quite a lot, too. So, both the crude supply and the refined products system are very tight.”
Q: It’s hard to talk about high energy prices without recognizing the impact of public policy on them. The Biden administration has taken some high-profile actions, but they appear to have had little real effect. At this point, does the administration have any tools left that might have some positive impact?
Yergin: “That’s a really good question. There aren’t many tools that are available. One thing [they could do] that they’re probably not going to do much is jawbone investors to give companies more latitude to increase production. That would be something important – it would be a useful message right now. [Energy Secretary] Jennifer Granholm mentioned that at CERAWeek, but I haven’t heard much about it since then.
“But the companies feel they’re under a lot of pressure from the investment community, so that would be a positive thing to do, in that it would send a signal that development can go ahead. The signals that [the administration has] been sending have been quite mixed. Since November, they’ve verbally encouraged more U.S. production, but there have been other policies that haven’t encouraged more U.S. production.
“I think the risk here is that, with gasoline prices high, with their impact on inflation and on food costs, and with an impending November election, that you’ll see panicky policies. Not just in the United States – you could see panicky policies in other countries that would be counterproductive.”
Q: What would be an example of a ‘panicky policy’ in your view?
Yergin: “For instance, a ban on oil exports. First of all, if you banned product exports, it would actually send gasoline prices higher. When gasoline prices go up, the familiar old sound bites get dusted off and played again. One we heard recently was the old ‘price gouging’ talking point, which doesn’t address the fact that it’s a very tight market and globally, we’ve had what I call this ‘pre-emptive underinvestment’ in oil and gas development in recent years.
“And, of course, in the United States, natural gas prices are higher, too. We don’t have a physical shortage of natural gas in the U.S., we have a shortage of pipelines. It’s very hard to get any new major pipelines done. In fact, it’s somewhere between very hard, and impossible.”
Q: Moving to the topic of ESG, which has been a driver of that ‘pre-emptive underinvestment.’ We have seen some talk recently that it might be losing influence in the investment community. Are you seeing that?
Yergin: “Well, I think what’s happening now is a shock. Some of the assumptions about how easy things would be [related to the energy transition] are turning out to not have been correct. I think there is some reassessment of ESG going on, and at the same time, many investors also want good returns. Therefore, they’re looking at the oil and gas sector in a way they weren’t looking at it a year ago.”
Q: Let’s talk about your book, “The New Map.” I read it for a second time recently, and was struck by the fact that you foresaw so many of the geopolitical events that have taken place over the past year. I wonder if there is any aspect of any this that has been really surprising to you?
Yergin: “It’s interesting. When people read the book, which provides so much context for understanding what is happening now between Russia and Ukraine, some of the reviewers wondered why I was writing about that?’ My response was ‘because it’s really important.’
“The last sentence at the bottom of Page 78 says ‘Ukraine is the issue that is going to blow up between Russia and the U.S.’ While I believed that, I couldn’t have imagined a war that would be going on for 100 days and that is probably going to go on for a couple hundred more days, and how badly Vladimir Putin miscalculated.
“But there are a couple of things to be said: First, he is still counting on economic turmoil in the West – inflation, high energy prices and so forth – to undermine Western unity. He says that – that’s clear.
“Secondly, the rest of the world – Africa, much of Asia, Latin America – have not lined up against Russia. They’re basically staying neutral, so it’s a more mixed picture.
“But a lot of these trends were clear when I was writing the book. When I saw Putin and President Xi Jinping together in St. Petersburg in 2019, and you see the nature of their relationship, you know where this relationship is going. And they then signed that agreement just before the war about ‘unlimited cooperation.’
“I guess what I did not fully foresee was the degree to which Russia would be closed off from much of the global economy. Sanctions are not easily removed and so Russia is going to become a lot more dependent on China than it has been in the past. The fact that Putin would in effect destroy the impact of 22 years of building a modern economy with a decision to launch a war – of course, he thought the war would be over in 4 days, that he would replace Zelenskyy with a puppet regime and Ukraine would basically become a satellite.
“I think he never expected the extent of the Western sanctions and the unity behind them.
“Another thing that is very relevant: I wrote about the global role of LNG, the geo-strategic role of LNG, and I don’t think people really thought much about it until this war. But now, I was just in Europe, and the Europeans now regard U.S. LNG as a strategic asset for Europe. They’re depending upon it.
“So, again, we talk about the potential for panicky policies: If limits were put on LNG exports, it would be a terrible shock to Western unity and Europe’s ability to stay the course.”
Q: Is the U.S. really a reliable LNG partner for Europe, given the energy philosophy of the Biden administration?
Yergin: “The Europeans are extremely interested to see what happens with the ability to build new infrastructure in the U.S., because it has really become part of their own security infrastructure. It is so interesting to me, seeing representatives of European governments – not companies; governments – come to the U.S. to find LNG!”
Q: What about Saudi Arabia? The White House indicated recently that the President would personally try to convince Crown Prince Mohammed bin Salman to produce more oil, but that hasn’t yet happened, and the trip was recently delayed until July. Do you see Saudi Arabia moving more and more into the China/Russia orbit of influence?
Yergin: “I think the old relationship with the U.S. is over. China is the main, critical market for the Kingdom now. In “The New Map,” I point out that this OPEC+ relationship, which is really a Saudi/Russia relationship, was personally fashioned by the Crown Prince and Putin in 2016 on the sidelines of a conference in Shanghai.
“[The Saudis] now want diversity in their relationships. The relationship between Saudi Arabia and the United States is still very important, but Saudi Arabia has other options. And, by the way, now, with the amount of money coming into the country, it has more options.
“The Crown Prince has said that he wants Saudi Arabia’s Sovereign Wealth Fund to be the biggest in the world, and it is probably on the way to being that. He sees Saudi Arabia becoming very influential in the world’s economy, not only as an oil producer, but as a financial player.”
Q: Are you working on a new book project?
Yergin: “Well, I’ve sort of thought about that, but right now, I’m really living ‘The New Map.’”
Q: As are we all.
Yergin: “In due course I’ll do a new book, but I haven’t quite gotten my mind around one yet, because the themes from ‘The New Map’ are happening every hour, and are about what’s coming next with China and the energy transition.”