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The New Map.
Daniel Yergin talks energy at Bridgewater.
The following is a condensed version of a recent conversation with Daniel Yergin, the vice chair at S&P Global and the author of The Prize: The Epic Quest for Oil, Money, and Power, which won a Pulitzer Prize. His latest book is The New Map: Energy, Climate, and the Clash of Nations.
He spoke with Bridgewater Associates’ co-CIO Karen Karniol-Tambour, senior portfolio strategist Atul Lele, and commodities analyst Sophie Large. The transcript has been edited for clarity and length.
Dan, welcome. You’ve been traveling a lot recently. What’s the most interesting thing that you’ve heard in your travels when it comes to energy markets or geopolitics?
Two things that really stood out are just how much is dependent upon the Chinese economic recovery—or lack of a recovery; and second, the continuing rethinking of what the energy transition is and how it will unfold. And maybe, if I can add a third thing, it’s the collision between energy and the growing intensity of the Great Power Competition between the United States and China.
This year we’ve seen China reopening its economy against the backdrop of the Russia-Ukrainian war, which has reshaped supply in ways that no one expected. As of today, West Texas Intermediate is among the worst-performing commodities year-to-date. What’s happened?
Most commodities have been weaker than expected. There was the expectation of a strong Chinese rebound, which was expected to drive more than half of the growth in world oil demand this year. It didn’t happen, so for the oil market, it’s been like that famous play, Waiting for Godot—waiting for the second half of the year, where the consensus still is that China will come back, and that will boost prices and commodity markets. But we’re pretty close to the second half of the year right now.
How is OPEC factoring that into their decisions, especially their push to cut output?
We’ve seen about a 2.8-million-barrel-a-day cut, cumulatively, from OPEC countries in less than a year. This is mainly about the perceived weakness in demand. The strategy, particularly of Saudi Arabia, is to get ahead of expectations, get ahead of the financial markets, in the sense that the financial markets have a big weight on oil prices. That has been the motivation of the cuts we’ve seen. They’ve been responding, really, to economic news.
In mid-March, the Saudi energy minister said, “We’re going to stick where we are.” And then a few weeks later, they cut production. What happened in between was the banking crisis in the United States and the anxiety reflected in economic markets about that. The most recent voluntary cut by Saudi Arabia was again aimed at dealing with expectations and trying to be a bridge into the second half of the year. The key thing is Chinese economic growth.
The recent production cut was unilateral, unlike the cuts in October and in April, which were OPEC-wide. And there’s been a lot of concern about compliance, particularly Russian compliance. What risks do you see to OPEC’s cohesion?
The Saudi minister is very experienced. He’s been through a lot of energy crises. I think he is very conscious of how, if you let it go too far, it’s much harder to get out of it.
That said—and here we get into geopolitics—the goal of the G7 price cap on Russian oil was twofold: to reduce Russian revenue, and to keep Russian oil flowing. Well, Russian oil has kept flowing, really in rather high volumes. It definitely creates a tension. If we went into a real economic recession, it would definitely be harder for them to manage price and keep it at a level that they are looking for in terms of revenues.
Russian production has held up, but at the same time, its oil industry has mostly been cut off from new global investment in technology. That’s part of what’s causing the market to expect a decline. Do you expect this ever to bite?
Certainly, the expectation of a year ago that there would be a big decline has not been borne out. It’s true that the Western service companies have left, but the 3,000 or 5,000 people who work for the Western service companies are still there. They still have capabilities.
Our team expects a decline—but a slower decline. To some degree, China can backfill; it has a very accomplished oil industry. I think where Russia’s big problem is going to be is in Liquified Natural Gas. They were on track to be the fourth of the Big Four LNG exporters, with the success of their Arctic LNG. But as I understand it, the cutoff of technology is really going to hit them hard, and they’re not going to be able to expand that. So that’s where you may see the impact.
It leaves Russia with a lot of stranded natural gas. Of course, the pipeline gas will go to Europe. But the stranded gas is just going nowhere.
Europe is still importing Russian LNG. At this point it shows no signs of not wanting Russian LNG. After all, it’s Putin who really cut off the bulk of the natural gas to Europe. So I think Russia’s looking to Asia, to its partner China, to other countries, and seeking to be competitive. I think it’s going to be tougher for them than it has been with oil, where they’ve had very willing markets. India, which imports 85% of its oil, is thrilled to get cheap Russian oil, because it’s really good for Prime Minister Modi’s GDP.
If we look at the oil price over the last five years, we’d say that it’s essentially been flat, which is pretty extraordinary against the backdrop of a pandemic, a war, and an accelerating energy transition. How should we think about these big geographic shifts?
They are a subset of the larger process that’s going on in the world economy. Until recently, we’ve had the World Trade Organization consensus, which was all about efficiency. The US imported 600,000 barrels a day of Russian oil for efficiency’s sake.
And now we have a world economy that’s partitioning. We’ll never have the global oil market that we had up until February 24, 2022, when Russia invaded Ukraine. And it’s part of the larger trend that we’re seeing, in terms of the Great Power Competition turning into a fragmenting of the globalization that has been so beneficial to the world for several decades. I think one other consequence is that costs will go up. Ultimately, you’ll have inflationary effects.
Let’s discuss Europe. The warmer winter gave its economy a little bit of a tailwind. It structurally reduced its demand for energy and sought to source more of it from the US. How permanent is that?
Obviously, Europe got through the winter. Warm weather was a primary factor, but demand cuts were quite significant. Industrial demand for gas in Europe was down about 27% from typical levels. Europe’s in a recession. You talk to the major manufacturers, they’re pretty gloomy about the future. It was very convenient to rely on cheap Russian gas until it was no longer possible to do that.
US LNG, along with LNG in general, has become very much a foundation of energy security going forward. When I talk to European former big buyers of Russian gas, they’re saying either, “We would only go back to Russian gas in a very limited way,” or “We couldn’t take the reputational hit of doing it at all.” So as long as Putin or a Putin-like regime is in power, I think the likelihood of any significant return to Russian gas by Europe is pretty slight. I think it’s one of Putin’s major miscalculations. He’s closed the door on what was his most important market.
Is any of the supply-side pressure from ESG going to curtail supply? And on the demand side, are we actually on a path to cutting back oil demand with all the efforts to move to other types of energy?
ESG has become much more controversial in the nine months since we last talked. We see fund managers balancing, pivoting, going in one direction, going to the other, being attacked from both the Left and the Right. You see these mobilizations of state attorneys general on the subject of ESG. Nevertheless, the funds continue to flow into ESG funds.
Even as we see progress, even as we see this incredible Inflation Reduction Act go forward in the United States, there are more questions and controversies coming up about the nature of the energy transition.
The Inflation Reduction Act—some call it an “Inflation Increase Act”—is huge, and it’s agnostic. There’s something in there for everybody. You have hydrogen, you have biofuels, heat fuels, carbon capture. At the same time, you have incentives for wind and solar that go out at least to 2043. It’s a huge amount of money, ranging from $370 billion to $1.3 trillion, depending how you count it.
There’s one big problem, which I call the “permitting pandemic,” because you may have the money, but it’s difficult to get anything approved, whether it’s offshore wind, a natural gas pipeline, or hydrogen and other plants. It’s not a big issue for shale, particularly if it’s in the Permian or in a state that’s friendly to energy production. But it is an issue for pipelines. You have a lot of gas that’s bottled up.
But, boy, we’ve counted over $100 billion of investment committed on the IRA. People are lining up. And the DOE, which really is much more significant and powerful now because it has a lot of money, is just trying to get that money out the door as fast as possible.
What are you seeing in Electric Vehicle adoption and implications for oil demand?
I’m in Washington and when I drive around, I count the number of Teslas I see on the street. They’re out there. I think federal policy is strong in this regard. The latest fuel-efficiency and pollution standards are really trying to drive up the costs of combustion engines and make them prohibitive. They’re using regulatory might, then incentives.
But the numbers—in China, just under 30% of new cars are EVs. In Europe, just under 20% are EVs. In the US, it’s 8.5%. This accelerates, and we do see that by 2030, 35-40% of new cars sold in the world would be EVs. And at that point, the loss in terms of oil demand from the EVs would cancel out the growth in transportation demand. So I think it will become a material factor. Automobiles, diesel and gasoline are around 45% of total demand for petroleum.
That’s when we start to see the plateauing of demand, around the 2030s. The incentives are so great. I mean, governments are throwing money at this. China has now overtaken Germany and Japan as the world’s largest exporter of cars, mainly EVs. This is going to be a new trade battlefield. We’ll see what kind of protectionism Europe puts in on EVs from China, even though European companies seek to preserve their market share in China.
California has said, by the way, that by 2035, all new cars sold there have to be EVs. That means all new cars sold in California after 2035 will have to have two-and-a-half times more copper, because EVs use two-and-a-half times more copper. We’ve estimated that in order to meet the kind of 2050 goals that are out there, world copper production would have to double by the mid-2030s. But unless there are incredible breakthroughs in technology that we don’t see—and mining is not a fast adopter of new technologies—we think the chance of doubling production by then is pretty low.
That gets to permitting. The permitting in the US for a new mine is five to eight years, and then you have another six years of litigation over it. We’re finishing up a study of how the Inflation Reduction Act will increase the need for copper, lithium, cobalt, and nickel. It adds, just for the US, another 12-15% to demand. And, by the way, there are also restrictions in this legislation about where this stuff can be produced. Then you get into permitting and free trade partners—it gets more and more complicated.
The US government has taken the lead in setting up the Minerals Security Partnership, which it says is intended to diversify supply chains for minerals. That is a great euphemism for reducing dependence on China, which now has a strong, predominant position in metals and metal processing. Even US copper gets exported to China to be processed, because the US once had 17 smelters; it’s now down to two.
As I see it, the issue of minerals is where you get the real collision of the Great Power Competition. People don’t understand just how mineral-intensive offshore wind farms and electric cars are.
You’ve described the global energy markets as very fluid. It doesn’t really seem as though that same dynamic of, “Okay, we’ll be able to get supply to match demand” can occur in the industrial metal markets.
Three countries produce 40% of world crude oil: Russia, the United States, Saudi Arabia. Two countries produce 40% of copper: Chile and Peru. In Peru, the president’s in jail, and in Chile, you have a government that’s pretty hostile to mining and wants to take control of lithium production. All the countries want to get their share of rents. It’s going to be harder.
When Jake Sullivan, the national security advisor, gave a speech on what he called “the new American consensus,” I asked about minerals. He said, we’re going to have to work with other countries, and we’ll have to get US unions involved, too, about mining standards. Well, that’s going to be complicated.
The big story that we’ve seen in China this year has been the increase in the supply of coal. How long do you think this will last? What’s driving it?
I don’t read Chinese, but my colleagues who’ve read the 14th Five-Year Plan note that in sentences with both “energy security” and “sustainability,” the words “energy security” come first. The return to coal reflects that.
Now, to some degree, the coal plants won’t be in base load, but will be there to deal with the volatility in renewables. In Asia, particularly in China, reliability is very important, reliability of the electricity supply. Energy security is part of that picture.
I did a paper for the IMF on the four main constraints on the energy transition. Number one is the return of energy security. Look at Germany, where the Greens took the lead in getting five or six LNG projects approved in weeks, instead of taking years and years, because of energy security. The second thing is achieving scale within our time frame, 25 years. In The New Map, I looked back at all these energy transitions. How long did they take? A hundred years. In 25 years, you’re going to change everything? That’s pretty daunting. Third, there’s really a north-south divide on the energy transition. We just did a conference called Energy Asia in Kuala Lumpur, and the Asians were saying, “We need to have our own voice on the energy transition. We can’t have that voice defined by people who have per capita incomes 25 times greater than us.” And the fourth thing is this mineral question.
How deeply committed are Chinese policy-makers, long-term, to getting out of coal? China is so big that they could be number one in everything green, and number one in everything brown, and they could be driving opposite trends at the same time.
You’re right, that’s exactly what they are now. They have half of the installed wind and solar, but they’re also the biggest user of coal. Everybody has agreed on a 2050 net-zero emissions goal. But China’s goal is 2060, Indonesia’s goal is 2060, India’s goal is 2070.
I think China’s motivated by climate goals, yes. Pollution demands it. But I think it also has to do with competition. If you produce 80% of the world’s solar panels, 80-whatever percentage of lithium-ion batteries—you just go down the list of things, what they’re now doing with electric cars. There’s definitely an economic strategy here.
Dan, thank you so much for your time.
I thank all of you for the opportunity.
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