In this exclusive interview, Oilprice.com publisher James Stafford talks with energy security expert Michael Levi, the David M. Rubenstein Senior Fellow for Energy and the Environment and Director of the Program on Energy Security and Climate Change at the Council on Foreign Relations (CFR), discusses. The interview was originally posted on Oilprice.com and is reproduced here with permission.
There’s been plenty of talk about potentially radical US foreign
policy changes as a result of the shale boom. While one shouldn’t expect
any dramatic US foreign policy move away from the Middle East, factors
are influencing a greater focus on Asia. Only one thing is certain in
this transforming world: The shale boom is real and the implications are
many and difficult to predict.
In an exclusive interview with Oilprice.com publisher James Stafford, energy security expert Michael Levi,
the David M. Rubenstein Senior Fellow for Energy and the Environment
and Director of the Program on Energy Security and Climate Change at the
Council on Foreign Relations (CFR), discusses:
• Why oil price stability is still all about the Middle East
• Why the oil and gas industry is heading towards transformation
• Why oil prices could drop substantially
• Why the US shale boom is real
• Why the shale oil boom won’t lead to major US foreign policy changes
• Why Keystone XL is pretty much non-essential
• Why we won’t see any radical change in renewables in the next five years
• The carbon pricing remains the best way to achieve meaningful results on climate change
Oilprice.com: What is the number one threat to energy security today?
I am not a huge fan of using the word 'energy security' because it
means different things to different people, and that makes it very easy
for people to talk past each other. What I would say the number one risk
to the stability of global oil prices--which can have big economic and
security ramifications--is the potential for major conflict in the
Middle East and instability in oil-producing countries.
Oilprice.com: Are there any other regions that have this same destabilizing potential?
Michael Levi: The
Middle East is always the place where focus is rightly drawn, because
it is the place where you can have outsized disruptions. One of the
things that I tend to emphasize is the need to focus and prioritize
concerns, and it is very easy to get [drawn into] every 100,000 or
200,000-barrel-a- day change somewhere in the world that might have big
consequences for one particular country, but does not necessarily have
outsized global consequences or national consequences that policymakers
need to think about. If I spend my time trying to think through what
policymakers should be paying attention to, my focus, when it comes to
disruptions to the oil system, tends to come back to the Middle East.
Oilprice.com: The UK-based think tank Chatham House has published
a new report seeking to demonstrate how the oil and gas industry is
under significant pressure that will lead to a transformation. How do
you see a potential transformation of the industry taking shape?
I think it is important to start with a distinction, particularly one
that is important in the US: the oil and gas sectors, to some extent,
are becoming two genuinely separate sectors, rather than one integrated
In the past, most natural gas was produced as associated gas
together with oil, and that made oil and gas as a single entity very
clear, something that made a lot of sense. Now you have a lot of
non-associated gas; gas being produced separately, often by companies
that do not engage in much oil production. They really have distinct
challenges and opportunities, and as a result, different sets of
For the natural gas industry, at least in the US, the
big challenges are low prices in the glut of gas on the market that is
not being matched by demand. A big part of this is certainly
idiosyncratic; there are people who are drilling to hold leases and cash
flow, and they are doing that en masse, which is a problem for the
At the same time, they have not been able to coalesce around the efforts to boost demand.
oil world is a completely different story and you have pressures from
different directions right now. On the one hand, you have a surge in
opportunities for development in countries where geopolitical risks are
relatively low. In the US, Canada, and Brazil you may need to still
worry about regulatory changes, but you are not worried that terrorists
will come and capture your workers.
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the same time, for a lot of the companies, that is not enough and they
are still looking globally, and they still face challenges from
nationalism and unstable regimes. On top of that, they are entering a
period in which there is probably more uncertainty in prices than there
has been for a long time. You have this collision of growth and supply
from outside OPEC, together with potential Iraqi growth and
substantial investment from within OPEC that really opens up the
possibility of a big, if temporary, price drop in the next five or so years. That complicates the outlook for companies, on top of everything else.
Oilprice.com: Really? You believe that prices could drop in the future?
I think prices could drop substantially. If you look at the most recent
IEA report or the most recent OPEC outlook, you see that if all
currently planned investment goes ahead, then at prices resembling
current ones, supply would greatly outstrip demand.
countries will pull back with production and investment in OPEC and
allow supply to match demand at relatively high prices--and I think that
is the most likely outcome--or they will not be able to decide who has
to pull back, and there will be an excess of supply on the market that
pushes prices down quickly. That is self-correcting, because low prices
cannot sustain the big gains in North American production. But you can
still have temporarily low prices that really shake things up for some
producers, depending on the properties of their investment.
of the IEA report, predictions that the US could pass Saudi Arabia to
become the world's largest oil producer by 2017 have come under a lot of
criticism. What do you think of the IEA’s predictive mathematics?
Predictions are always wrong in one way or another, and I am not going
to second-guess those who have thought to a much greater depth in these
analyses. There is a range of estimates out there, but the IEA ones are
The bigger issue is: what are the
implications? Everyone likes to talk about how their projections show
that the world is being reborn anew, and will be fundamentally different
from what it was in the past.
There is a temptation to oversell,
and I think it is reasonable that people react negatively to efforts to
oversell the consequences of the changes going on in energy.
Oilprice.com: What are your views on the shale boom? Do you believe it can live up to the hype?
It depends on what hype we are talking about. I think the shale boom is
for real. I think that a lot of the criticism that we do not know
long-term production rates and so on are important to look at. But even
if you assume that returns on wells are substantially lower than most
people think they are right now, our projected output is still quite
high, because producers’ economics are dependent primarily on what
happens in first few years after they drill. We know roughly what
happens in the first years after producers drill.
The hype that
says that this will all replace coal without any government
intervention, gas prices will be $3 forever, or that we will be the
dominant exporter in the world, are out of contact with reality. We have
temporarily depressed prices, they will rise a bit. Hype always has the
ability and the tendency to outstrip reality, but in this case, reality
is pretty radical itself.
Oilprice.com: Could the shale boom lead to a change in US foreign policy priorities, away from the Middle East?
An economic analyst will typically tell you that the US shale boom will
fundamentally change US vulnerability to energy events in the Middle
East. But not every policymaker listens to their economic advisors.
do not think that US policymakers will step back and say, 'We need to
revisit our strategy in the world, because of this oil boom.' I do think
that what is happening will weigh on ongoing
discussions that already exist about future US priorities.
most obvious one is the discussion from the US Department of Defense
over how much to shift from the Middle East to Asia. Within that
existing debate, I have no doubt that people who want to see more of a
shift will emphasize what is happening in US energy. I think it will
have some influence, but ultimately, I do not see a radical change as
Oilprice.com: Now that Barack Obama
has won a second term, what do you see happening with the Keystone XL
Pipeline? Will it go ahead? Is it essential to US energy security?
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I made a prediction once on the Keystone XL Pipeline, so I have lost my
license to make future predictions. The Keystone XL Pipeline is
non-essential to US energy security; it is also not disastrous to
climate change. It has been overblown by both sides in the debate. It is
one pipeline that would carry a modest, but non-trivial amount of
crude, and that would help create economic incentives to increase
production, again, by a modest but not earth-shattering amount.
more fundamental question is whether the US is going to let
economically-rational infrastructure go ahead. I think if you replicate a
pattern like the one that some would like to see for Keystone and you
start blocking pipelines all over the place, then that becomes a larger
In the end, will it make the US more secure in
any meaningful way? I doubt it. Prices for Canadian oil rose more during
the Libya conflict than the prices for Brent Crude, or WTI. It is hard
to say that Canada gives the US potentially more security aside from in
Oilprice.com: One would
have thought that the natural gas boom would be good for the
environment, but the cheap gas prices have also hit coal prices, and we
are seeing Europe sucking up unused US coal. Is this a trend we can
expect to continue?
Michael Levi: I think it is a
trend we can expect to continue to some extent, particularly if Europe
does not make stronger moves away from coal. The state of our knowledge
about global coal markets is pathetic. All we can say right now is,
directionally, more gas in the US means cheaper coal, which leads to
more exports, but we are still far from being able to really put
quantitative meat on those bones, and making some meaningful net
Oilprice.com: What do you believe is
the best way to achieve meaningful results on climate change? How much
of an influence will Hurricane Sandy have on this debate?
Michael Levi: I think Hurricane Sandy has put the debates into a prominent place, which is essential to moving it forward.
I still believe that carbon pricing in one form or another is essential
to achieving deep cuts in economically-sensible ways. That can come in
the form of a tax, resurgent cap and trade, or clean energy standard;
there are all sorts of ways to do carbon pricing. In the long haul, I
think you come back to that, particularly if you care about doing this
is an economically efficient way. [Italics added]
What changes in public interest on climate change have you noticed over
the years? Do you think that at this rate climate change will ever gain
the support it needs to be effectively tackled?
Michael Levi: Ever
is a long time. I think we are back in a building phase. If you look at
the first decade of this century, you had a solid 5 or 6 years that was
really about building broad support for action on climate change, about
test driving different approaches, and by the time you got to 2008,
there was actually pretty broad support, particularly in the Senate for
action on climate change. You had 2 presidential candidates competing to
see who had the best climate strategy. Then you had the financial
crises. You had intense polarization. You had a deep, deep recession,
and climate action became a much lower priority.
A lot of people
got used to saying in early 2009 that we would come back to climate
change when the economy got better. The only mistake that people made in
that analysis was thinking that that was only a couple years off. It
turns out that it is even further off.
One of the emerging
barriers to action on climate change is that doing things to exploit oil
and gas have been set up as 100% incompatible with serious efforts to
deal with climate change. That stark choice makes it very difficult to
build coalitions that will move anything forward. We have actually moved
in the last couple of years into a considerably more difficult
situation than we were even 4 years ago, when a candidate like John
McCain could say, 'I support oil and gas production, and I support a
strong cap and trade system.' The president talks about things like that
today, but gets considerably weaker support for it, and that ultimately
needs to change.
Oilprice.com: How can this change?
Michael Levi: I have a book
out next spring, talking about this. The first step is for each side to
recognize that accepting a lot of what his opponents want will not
fatally undermine what it wants. Oil
and gas will need to understand that serious action on climate change
will not fundamentally undermine what they want to accomplish in the
next decade or two. People who want to take action on climate change
need to fundamentally understand that expanding access to US oil and gas
production will not fatally undermine their own goals. Compromise is
not an oxymoron.
The second thing that needs to happen is
there needs to be some rebuilding of trust. That is difficult; you do
not just do it by hanging out more at the bar. You need to do small
deals that show that you can work together.
You can think of all
sorts of ideas; you could tie royalties from increased oil and gas
production to financial support for renewable energy. You could provide
support for carbon capture and storage demonstrations that support
enhanced oil recovery. You can work to improve environmental permitting
so it is easier to build pipelines and power lines that take renewable
energy to places where they can be used.
There are a host of
things that are small (but not trivial) win-wins that might help rebuild
confidence. Ultimately, both sides need to accept that a political deal
is better than trying to go for an outright win.
Oilprice.com: What role do you see renewable energy playing in the future?
Michael Levi: In
the near future, renewable is cost-competitive in niches, but it is
still not broadly competitive in the US economy. It has a potential to
Renewables have cost and intermittency challenges. There is
important progress that is being made in renewable energy. I think a lot
of that story has been buried in the oil and gas discussion in the last
couple of years, but we are seeing record-low prices across the board,
and we are seeing record-high deployments. It
is important to remember that we still need government support in all
these areas if you actually want to see costs come down meaningfully.
Oilprice.com: How do you define the ‘near future’?
I do not see a radical change in the relative price of renewable energy
and fossil fuels in the next 5 years. Ten years is more difficult to
predict, but I would be skeptical. When you start to look ahead one or
two decades, particularly when you add in policy uncertainty, it is very
difficult to predict what will happen.
Oilprice.com: Can the US afford to turn its back on nuclear energy?
If you mean by turning its back, you mean a phasing-out of nuclear
energy, I do not think that is sensible to do. Nuclear energy provides
20% of our electricity, and the marginal cost of production is extremely
low for existing power plants. The real question is can the US afford
to turn its back on nuclear in the future as a source of zero-carbon
energy growth? The answer is: we do not know, because we do not know
what the alternatives will be, or if there will be significant
alternatives. So you want to keep nuclear alive as an option; that means
trying to figure out ways to bring down costs, particularly financing
costs. It means looking for ways to resolve, or at least partly resolve
the waste questions, and it means looking for ways to potentially
innovate on small modular reactors to provide a different economic model
and a different construction model for nuclear power.
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