tv AEI Discussion Focuses on OPEC and Energy Policy CSPAN January 10, 2017 4:16am-5:20am EST
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the future of global oil markets. from the american enterprise institute, this is an hour. >> happy new year. and to the new building as well. and it is great to have be here in. so i'm going to give -- with the clock running, kind of move in to a broader discussion. but looking at we have the opec deal reached in november after kind of watching the price go up and down throughout the year. and going into 2017, will that price hold? what implications does that have for president-elect donald trump and his administration and also for many of the opec producers
and non-opec produce irs. it's an interesting conversation. i looked at the price of oil before i came to the event. it's about 55. that is the range i believe they were hoping for back in november. so it's an interesting moment to watch. i'll start with ben who will give a few minutes of opening remarks. ben is john g. searle chair where he works on energy and environment policy. i believe he also served at one point in the bush administration of the white house and also served at state. >> the regular administration. >> the regular administration. >> i'm a little older than you. >> and also the special envoy and coordinate for international energy affairs and heads the bureau of energy resources at
the department of state, which has become kind of the new focal point for international energy diplomacy. under his leadership from negotiations on curtailing both initially iran's moving oil off the market for iranian enforcement sanction to national energy issues. and also looking at notably as well working with counter isil operations which is another critical element. so it's quite a broad range of places. so i think you along with the secretary have been more on the road than probably most in the past couple of years. so it's an honor to have you here. and thank you again. ben, would you like to again? >> sure. how long should i --? >> probably about a few minutes. >> let me in a very cursory fashion offer some thoughts of my view of medium term priced on
amex in the world, the oil market in the wake of the opec agreement from last month. also, i want to offer just a very brief thought or two on what the agreement tells up the house, its view of hold on power. and second on what i like to call the sabotage model of the world market. it's something i'm just starting to think about. but the central topic is prospects for oil prices. and i think that there are three points to be made. the first of which is quite straight forward. i think that the agreement is unlikely to hold the production cut of about 2 million barrels a day, very roughly 2% of global production, depending on what you want to put in the denominator. the russian agreement to cut 300,000 barrels a day i think is
particularly implausible to me. and more generally, the opportunities to cut prices on the part of individual producers without cutting them really much greater than people tend to appreciate. and you can give more than 30 of the standard 30 days' credit. you can sell higher quality blends, lighter cruise for the benchmark price, et cetera, et cetera. more important is the reality that even if the production agreement holds, the response from the rest of the market is likely to erode prices over time. i've done some simulations of this under very reasonable sets of assumptions. and what you get are production increases of something on the order of 200,000 barrels a day
from new investment and increased deficiencies as a response to this initial increase in prices from about $35 to about $55 now. and then -- and then the result of that is in a standard sort of simulation under, again, very reasonable assumptions, you get price reductions of about $1 to $2 per barrel each year moving forward exceptionally. there is the further matter that there are two factors i think that are underappreciated in the popular discussion. one, if there is an important tax reform in the u.s. that cuts the effective tax rate on income from capital, then the effect of that will be to increase capital investment in the u.s. and therefore the demand more generally for dollar-denominated assets. and that will have the effect of strengthening the dollar and
putting downward pressure on the dollar price of oil there is also the newly implemented fed tightening or at least increases in the federal funds rate, interest rates generally. and an increase in interest rates will result both from that and from the increase in demand for investment that i just mentioned. both of those effects will increase interest rates. and it turns out in a sensible model of the price of a resource, oil in this case, that is substitutable over time, i won't go through the technical detail, it turns out that an increase in interest rates drives the current price of those resources down. and so i think as interest rates rise, oil price, the pressures on oil prices will be downward, no withstanding the opec action agreement from last month.
let me turn just briefly to two ancillary topics. i did another simulation. if the house of saud viewed threats to its rule as deeply serious, their net incentive would be to increase production now and grab all the revenue they can, and then head for the airport and fly to their villas in switzerland. the fact that they have agreed to cut production, in their case by not quite 500,000 barrels i think is the opec agreement suggests to me that they view threats to their rule as less serious than otherwise would be the case, notwithstanding the bombings in riyadh and all the rest. if you look at the data on disruptions as a proportion of global output, this is the final point that i'll make. there has been a monotonic decline in disruptions in global
output starting in i think the summer of 2012 through november of this year. i've seen the data after two months ago. and with that decline and disruption, the importance of disruption, what we have observed is a decline in world market prices. and i have -- i'm just starting to think about this. but i think it's reasonable to believe that there is for want of a better term a market for pipeline bombings and all the rest that have the effect of moving prices toward the cartel equilibrium or the cartel optimum. so it will be interesting to see if i am right, the prices from this new cartel goal start to erode over time as a result of increased production internationally. and/or cheating by participants in the agreement. then it will be interesting to see if price declines yield an
increase in disruptions of proportion of global output. and the jury remains out on that. so thank you. >> thank you. amos? >> thank you. good morning. thank you for having me in the new building. and thank you for having me at aei. it's really a pleasure to be here. and i should say my kids certainly agree with you, andrew, about your assessment of my travel over the last several years. and that's the problem with a global position. but i think that what i want to thank you most is for the recognition of where sort of the role of energy in foreign policy, energy and national security, which has really come into play over the last several years. and i don't believe that the creation of an energy bureau, first by senator lugar at the time in the senate foreign relations committee creating this special envoy position, and then turning into a bureau was
a -- we thought about it as a visionary thing. but it's actually a response, a late response to what was the real politic. energy was already playing a major role in decision making by other country, and we needed to recognize that and address it. and you cannot -- when you walk into the room and the other side has a calculus that you are not familiar with, not understanding and not putting into the general foreign policy equation, then you're not going to get the optimum results of that negotiation or interaction. so i think that's what we've been trying to do over these years. and that's why it stands from the iran sanctions to isil to european energy security vis-a-vis russia, southeast asia, central america, et cetera. let me look at the opec question, of the opec decision from last month in this light. we've gone through a process in
the oil markets over the last several years that was very different than the previous 100 years. we've always had peaks and valleys in oil prices. and we've had the cycles. and i don't believe that this cycle that we've gone through over the last couple of years is the same -- or actually last several years is the same as previous cycles in a couple of ways. it has obviously the similarities in the rhythm to previous cycles. but here is where i think the difference. we've seen a -- just like in other sectors affected by technology, advances in technology are now faster and more immediate. and here too the oil industry is no different. and it had a transformable -- transformative effect on the oil market. here is what i mean. in the united states, we went from 5.5 million barrels a day
production in 2007 to a peak of 9.6 million barrels a day in 2015. that is unbelievable. there is not a lot of examples in history of an increase of 4 million barrels a day from one market, from one country. that doesn't happen. in 20 -- in the 2010 -- 2011 to 2015 time period, where the global demand for oil grew at roughly a million barrels a day each year, think about it that way. the entire demand was met by only one country. it was met by the united states. that's unbelievable. so the increase, the delta of the united states was just the delta was the second largest producer at opec. think about that one. that's remarkable. it also changes everything. because if the united states can
increase that kind -- one market can increase production at that rate, at that level. and remember, when we were at 9.6 million barrels a day in 2015, the projection by eia and by the ieia was that the united states was going to grow another million the next year that was the 2014 projection, that we were going to increase another million. now in fact what happened is we decreased by 1.2 million barrels a day from peak to valley. but that meant a number of things. one, the cartel's normal response is that if prices are too low, you increase -- you decrease production and you have an immediate effect. or you fight it out. you let the latest producer, the united states, the most expensive producer, you dry them out. you say i've got reserves. i can ride out a 28, 34, $40 oil
price and kill your industry, because everybody has told me, because i watch too much television and cnbc, every export has told me that the u.s. production of shale oil can only be profitable at 80 to $85 a barrel. that was common wisdom. now as the prices were falling, everybody tells you on wall street when a price falls, don't try to catch a falling knife. well, everybody was trying to predict what the rate of falling knife was. therefore the price equalled the level playing field for oil production in shale in the united states. that tipping point was $80. well, then it became $5, or around the number of whatever it was that day when the analysts went on tv. you watched people go on tv say it's $80, $75, $70, 65, 60, et cetera. because nobody can fathom the changes in the united states. the resiliency, the fact that we -- in fact declined a lot from 9.6 to 8.4 million barrels
a day. but the resilience of production meant for opec the u.s. wasn't going away. shale production wasn't going away. so letting it ride low was not going to be the answer. and therefore what is the answer? i think the mistake that opec makes and continues to make is trying to deal with the future based on the past. only. and looking at what happens in the past and looking at the paradigms of the oil market in the past. it's all about market share and price, and how do i navigate between my how long can i take a lower price in order to maintain my market share. well, here is where i think the reality actually. in doha, the decision was to freeze. doha fell apart and it didn't happen. in algiers, they made progress. and at the end of november, they got the cut. the cut was 1.2 million barrels a day. that was the agreed cut.
let's break that down. because it wasn't a cut. if you look at production levels at the doha meeting when they wanted a freeze, they were roughly the same as the levels -- they were 1.4 million barrels below production levels in november 30 when opec made the decision. meaning as they were negotiating a cut, everybody ramped up production in opec. so we had a 1.4 million surge, and then we had a cut of 1.2, which brought us back essentially to the freeze levels of doha. but remember this. why did we have the discussion about freeze in doha? because we had an oversupplied market. so if we're freezing production at an oversupplied market rate, then we're still at an oversupplied market. so we had a rally. but here is where the 1.2 breaks down further. the 200,000 barrel a day iranian cut is just about 200,000 barrels above what they're
producing today. so iran didn't cut. they agreed to cut the level of hoping what their production could rise to. so their production we think is about 3.6. opec officially says 3.7, and their cut was to a ceiling of 3.97. so the so the 1.2 million cut is actually a million cut roughly. now, since october when this agreement was negotiated, the united states increased production by 300,000 barrels a day. so we're now longer at 8.4. we're back up to 8.7. so that's 300, take away from the cut. now, libya is at 200. above. or 150 from october. but from their low they're rising. nigeria has increased about 150,000. and nigeria and libya are exempt from the deal. so here's what happened.
1.2, which is really 1, just half of that cut is gone. it's already been replaced by new oil. and here's where the mistake has dramatic consequences. because of this process what has happened? traders normally react to headlines. so oil price fluctuates by headline. so we announce a freeze, potential, talks about a freeze, oil prices go up $2. falls apart they go down $2. when they got the cut and all the headlines are about how the cut's taking hold big headlines, saudi arabia announces to their customers they're going to have less oil, iraq does, et cetera, well, in the meantime that means price went up to about $55 a barrel you said today. right? well, at 55 u.s. production is humming again. that's we're at 8.7. you want something that i think should scare opec more than anything else?
in 2014 we were producing 8.7 million barrels a day and rising ultimately to 9.6. 8.7. to do that we used 1,600 rigs. today we're producing 8.7 million barrels in the united states and we're using 525 rigs. that's a third. you know what that means? it means that when you have a free market versus a controlled market of oil in the united states as we do in the united states and we're the only ones that have it, you get efficiencies when the price collapses. you don't get subsidies. you don't get government coming in and bailing you out. you get efficiencies. and everybody shares the suffering. the oil companies, the service companies, et cetera. but that means when the price rises again the efficiencies are there. so we can get to 8.7 million barrels a day with only 525 rigs. that means if we keep the prices at $55 to $60 as opec, quote
unquote, hopes, then opec loses and the united states wins. because production will continue to rise because we have the ability to produce shale oil at $32 a barrel in some formations, $40 in others, et cetera. so actually giving this window a cushion for american companies to increase production, that's the result of the opec decision. so the short-term gain of a few hundred million dollars a month in the increased price between -- if you calculate the loss of production, gets erased. and when does it fall apart to your point? when market share starts getting affected in the next couple of years. we lifted the ban. so at some point if knees nominations are continuing to cut and the united states can replace it -- >> you mean the export ban. >> the export ban on crude oil. then all of a sudden countries are going to say wait a minute, now i'm taking a low price and i'm -- a higher price but only
about $5 a barrel and i'm going to lose market share. that's where it goes away. let me give you one final point. the u.s. national security interest around the world is in contrast right now to what opec wants to do, not because of oil prices. for me as the united states i want libya to produce and export as much oil as possible because the fragile gna, the government national accord in libya to take hold and to keep stability, for that coalition of militias, i need money. and the only money in libya is out of oil. so if they can continue to increase exports and have money to pay soldiers and civil service and the public sector and spur investment, that's a good thing. so i want to encourage libya to continue. it's going well in some parts, but specifically in the parts that allow the pipeline to reopen. and ports to reopen as it has. that's why they're up 200,000
barrels a day. that's why i think they're going to continue to rise to 800,000 and 900,000 barrels a day, which is another 200, 300. nigeria, you can't beat boko haram if you do not have oil revenues. that's the heart pa pumps the oil vessels in nigeria. so the trouble in the delta has to be resolved and they have to go back up. that's our interest. if we want to liberate mosul and actually make it successful who's going to pay for the rehabilitation of those areas that are being bombed to hell right now? those villages have to be rebuilt. with what money? there's no money in iraq. only oil. and how does kurdistan go tok back to growth? only oil. it's in the united states' interest for these countries to increase production. so it's not that i care about you're a cartel you're not a cartel i think it's inefficient and ineffective, that's beside
the point. i actually have a foreign policy disagreement. that's where i think there's a mismatch between understanding the long-term effects of the market that opec needs to face and the changes versus what actually is happening. sorry for taking longer than i should have. >> on your point on that is quite a critical point. you look at kind of the shift in the markets and the geopolitical imperatives for a state such as saudi arabia or iran or let's say take saudi arabia where a higher -- whether this agreement holds or not really is real-time for whether or not the deputy crown prince's reforms go anywhere. and the point that he was reaching until starting in january as his austerity cuts begin to hit and with the recent oil price you're allowed to have more budget room in the saudi budget which allows more support for the deputy crown prince. it makes sense in the case of libya or iraq or nigeria but on a state like saudi arabia are
probably, you look at iran as well to achieve some of their own economic reforms and also have that buy-in. it strikes me that the imperatives that were needed to get to some more effectiveness of opec in terms of moving the market will increasingly as you both have noted, increasingly becoming more and more difficult. which i think presents its own kind of challenges probably to u.s. foreign policy objectives as well. >> i'm not going to presume to give advice to the saudi deputy crown prince. he understands his market, his economy and his country far better than i do. but -- or than we do. i think the sooner that every member of opec and every oil producer understands that the tenets of the market have shifted and changed and that using the tool kit of the 1990s and even the early 2000s is not
going to work, the sooner that is absorbed, the better. and i applaud the deputy crown prince for having the willingness to put the effort and the work and the time into vision 2030 and to moving the country in that direction because that's exactly what i'm trying to hope that -- i hope they do. and that is reform the basics of the economy so that you're not having this total dependency on a commodity that you no longer have the same ability to control as you once did. and as the swing producer of the global oil market that they have been for the past several decades, that status is not there. they are not swing producer anymore. and i know the rest of the world talks about it like they still are. they're not. the swing producer of the new
world is the united states and more importantly the free market in the united states. how much is produced in the u.s. will not be determined by any individual. it will be determined by the price. we have 4,000 producers in the united states. they don't make decisions in unison. they make decisions on their pnl. they make decisions based on their private equity shareholders or their stock price or their -- what price they hedged at. that's going to define what negotiations they can get with halliburton, schlumberger, n.o.v. and all the others. that's the swing producer. saudi arabia, there are some very obvious steps saudi can do. one is stop burning your own oil for power generation. do that as soon as you possibly can. because you should be selling that barrel at $55 on the market and not selling it -- not burning it for $2 in your own country. gas, natural gas because of the revolution in natural gas, natural gas is so cheap there's
no reason why saudi arabia should not be converting to importing natural gas. despite there's the issue of psychological pride and all the other issues. renewable energy should be part of the mix. small but it should have the ability to grow into that mix. there should be a diversification of their own internal energy market which will allow them to cut subsidies and to your point of what happens with the local population, that's what will help you. yes, it means prices may rise at the pump from a couple of cents a gallon to something more market-based. but look, uae did it and it's working. but you've got to get to that economy that drives them to investments in other places. >> you both have remarked about opec as kind of the effectiveness of opec as a cartel and compared to with this new realities. are we seeing kind of the obituary of opec in the coming year or two? are we seeing the shift? because on the one hand there are the market shifts.
on the other hand you can look at kind of the failure at times in doha when the deputy crown prince pulled the plug on the agreement and going toward now the -- and eventually kind of reaching an agreement from al jeers and onwards. but the concessions saudi arabia had to make to iran and also as well working with russia, is this a sign that opec's effectiveness as an organization has also been greatly diminished itself? >> as a footnote, i mean, opec has never really been a cartel in the classic sense. of allocating production shares in order to minimize the cost of production. opec has been a big guy to the saudis and a bunch of little fish that hang on for the ride. in that sense given that saudi production and opec production are now a good deal smaller as a proportion of world production
and was the case even ten years ago and the substantial part as amos has mentioned because of u.s. shale -- the shale revolution and with horizontal drilling in the u.s., the ability of opec and the saudis in particular to prop prices up has been substantially reduced. but it is still the case. the saudis by cutting production can cut prices. in that sense they are a swing producer. they're just not as important as they used to be. back in the '80s when the saudis decided that their production level of 3.5 million barrels a day on production capacity, i think it was 11 or 12 million barrels a day was simply unacceptable and they started pumping back in '86 i guess it was, prices fell from what, $36 in linear dollars down to 11 or something. something like that. but the ability of the saudis to engineer those kinds of shifts i
think are dramatically reduced, particularly given their need for revenues to buy social peace, et cetera. i think i disagree a bit with amos about the advisability of burning $55 oil domestically. it doesn't strike me as entirely obvious that it is irrational for the house of saud to buy social peace by subsidizing the consumption of a wide range of consumer goods, particularly given the potential problems with the shiites in the east, et cetera, et cetera. so although i agree it's costly, you're certainly right about that, but it may not be irrational. i don't think -- you know, opec, it's always been very difficult for any cartel to preserve a cartel price unless they are
propped up by government regulations and opec is not. it's always been difficult for opec to make price increases stick ever since the early 1970s when opec became important. and i think that ability has been reduced as you suggest in your question now, but i don't think it's zero. they can certainly affect prices but not as much as used to be the case. >> looking at kind of the one area that i imagine you probably witnessed quite firsthand, was kind of the evolving russian-saudi understanding that with i believe it was president putin who called the supreme leader and that there was a lot of direct moves as well via putin in terms of his own energy space in russia. do you see kind of this russian-saudi cooperation on energy continuing to be a theme? i think it confounded some of the typical thinking in
washington of seeing the russian-saudi relationship purely based on other geopolitical factors but it did show in this agreement that there is space to actually have cooperation and also some incentives and you also have qatar recently joint investments with rosneft. is this a sign that russia, the russian gcc kind of on the energy dimensions is going somewhere or was this kind of a one-time kind of agreement? >> i don't think energy is -- i think often energy is not about energy. so when we read headlines about energy, russia-saudi or russia-iranian conversations about oil markets it's not about energy. what is good for market policy. it's not a dissertation on free markets versus non-. i think what it's about is russia is actually becoming closer and closer to becoming an opec-style country from its economic design.
as the rest of the russian economy collapses and continues to collapse, what holds russia afloat are things that come out of the ground. so minerals, diamonds, oil, gas. and the military-industrial complex. and then the money that's used from that to infuse into the economy. the rest of the russian economy is not exactly humming. and therefore the dependency on what is direct oil revenues versus -- and plus indirect oil revenues. meaning revenues that come into the treasury of russia from things that are themselves financed by energy revenues. that becomes a bigger and bigger part of the existence, the mere existence of the russian economy and ability to operate in the world. so there is starting to be this more symbiotic seeing the world through an energy lens through the perspective of what can i afford to do. and i'm engaged in very expensive efforts, both saudi and russia, in my foreign
policy. i need to make sure that my population, the declining economy doesn't affect the population too much. so there is a lot of similarity in facing the crisis. russia has also a secondary problem. they sit on enormous reserves but declining production coming years and the plan was to replace the declining natural production was through areas that then became under sanctions. so the ultra deep, the unconventional, is under sanctions and they could not -- they have to stop. the exxon discovery is not being produced, for example. so -- so they have to -- they're facing how do i continue to afford this. and i think that's part of the reason for the cooperation, was necessity. >> but let me restate the question if i may. in the narrow context of the oil
market, are russian incentives, which are the same for all producers, to cheat on a inclusive agreement because you can cut revenues and profits, that's true for any given producer, are those incent ifds greifds incentives greater or smaller or weaker than the ability of the putin regime to threaten given individual oil producers in western siberia? the theft of yukos, apart from the humanitarian disaster, is really quite revealing in that regard. and the question is to the extent that putin decides that adhering to an agreement with the saudis is in his interest, can he enforce it domestically? i think that's -- >> i think the agreement he cut he can enforce because he didn't really agree to anything. what did he agree to? cut the potential -- what they projected to be the increased
production they won't increase as much. that was basically what russia agreed to in the opec agreement. it's a fairly easy agreement to fulfill if they actually do -- if you actually believe that they were going to increase the amount that they were, which i am skeptical about, then yes. so they cut a little bit about what their projected growth was. but remember, this agreement is a six-month agreement. so if you do a little bit of your maintenance in the first part of the year, in the first two quarters of the year, you're pretty much free to do whatever you want in the second half of the year. and so he didn't agree to all that much. the ability to enforce it i think is total and complete if he wants to. i'm not convinced that he is going to put too much effort. i think the reaction from igor sechen in the early days of the potential agreement where he said publicly in istanbul at the wec, at the world economic congress -- world energy congress, where he said publicly
we will not come to an agreement with opec, we will not cut production, and then a few days -- the next day president putin in the same conference said we will reach an agreement with opec. i think you see the fissures and disagreements there. but i think ultimately if he wants to enforce it he can. i just don't think that's going to be all that relevant. what the most important part of the russia-opec agreement was the headline that it generated. and this was affecting market sentiment far more than it was market balances. >> and a final question before opening it to the audiences, is in looking at kind of iran in the picture, we have elections coming up this may, we have a new administration that may or may not, either whether it is tearing up the jcpoa, enforcing it more, a number of different rhetorical positions. but one question is kind of on iran specifically on iran's return to the markets and in this agreement and also kind of
arguably the pressures that president rouhani is facing at home on trying to deliver on some economic reforms. do you see that -- and there's also the structural limitations in iran's own oil sector. it's over 60 million. maybe the numbers are off on that. but looking at kind of -- do you see that -- do you see iran kind of producing in this current range for the foreseeable future? it seems to me it's another case of -- you mentioned president -- of russia's economy. this is really the only momentum at the moment, it strikes me, for the iranian economy. >> look, as someone who spent a whole bunch of years enforcing the iran oil sanctions and spending an enormous amount of time taking iran exports from 2.5 million barrels a day to 1 million barrels a day, i had answered a question -- i was asked right after jcpoa what can
they rise to, and there was a lot of skpt siz m in the west whether or not they can -- how much they'll be able to rise in the short term. my view is that -- and it's pretty much -- i'm a little bit -- my remarks at the time were a little bit too bullish. i thought about a million, that they would increase a million in the first year. they've increased about 850,000. so not too far off. i think they're going to continue to increase their production. but with a ceiling until they can do real work and real development of the fields. they have to put in a lot of money there. we judge iran and iraq and other similar economies through our own halliburton lens, of what's the manual say of what do you do with a field in this condition. oh, you shut it down, you do investment, you can't do this, you can't do that. that's not how it works in the field in large parts of the world. you look at -- you produce as much as you can and you use whatever you have, whether it's chicken wire and some duct tape.
then you do that. and that's why they've been able to increase. they have excellent engineering capability. they have never lost that. they manage the sanction period in a smart -- from an engineering perspective in a smart way. and therefore, they're going to be able to continue to increase. i think they were the winner on the opec deal because they were free to continue to increase production. they've signed m.o.u.s now with total and a few other companies. i think the challenge for iran down the road in the next -- not in the next six months but in the next year to five years is turning those mous into contracts. and what's held them back since the beginning of the jcpoa has been atability to get a consensus position between the hard-liners and the more reform-oriented on what kind of contract to allow. and if they can get to the point where they give -- offer a contract that western companies can accept in the new environment of high -- iran's
still high risk and relatively speaking low oil prices, then you're not going to see that kind of growth in iran after a certain point. i think they still have a few hundred thousand barrels a day room to grow before they reach that ceiling of where they will need the real infusion of cash. but that's really important. they got what they needed out of this opec deal. the question will become for iran what do you do -- and the saudi-iran relationship on this issue is what happens at the six-month mark because at six months they could be renewed. if they reach the quota of 3.9 by the end of the sixth month do they agree to stay with that number or do they demand no, i need now another bump up so i can keep growing? because they need that money going into elections and to grow the economy. >> so we have about 15 minutes or so for questions. we'll go with adam early. >> you talked about oil prices.
can you talk about oil prices in the following way? relating it to both your remarks about free markets and u.s. national interests. so how do -- discuss whether high oil prices are good for -- good or bad for the u.s. economy and good or bad for u.s. national interests, number one. number two, to what degree can national policy makers take actions that correlate what price is good for them with what the market reality is? >> on your second question that you just asked, in the united states? >> yeah. particularly the -- well, and now to make it more political, particularly the trump administration. >> i think it's very hard to have a conversation about what's good for america, high prices,
low prices because what's a high price, what's a low price. i think when you avoid -- i think the government should let it go as long as you don't go to the extremes. right? so when the libya war started and we lost 1.6 million barrels a day production on the market overnight and panic ensued and we had a massive increase in price, we had just been in the second quarter of a very weak recovery from a recession and that drove us right back into recession. in other words, prices rose so fast so, extreme that it affects our economy. and that's when we at the time had an enormous amount of meetings about what do we do about it. there's not that much we can. but we did. so we released from the spr, from the strategic petroleum reserve at the time, and we did it in a coordinated fashion with the iea, with other -- with our other oecd partners, and we had conversations with other producers about what their intentions were as far as increasing production.
but that's at a very, very extreme level that happens as a result of an extraordinary event that changes the market not from market forces doing that. obviously, opec tried major interventions that ben described before when prices went -- even dipped into the single digits for a while where the headlines were will we ever see $20 oil again? and that was the same question we asked when we were at $100 oil just from a different perspective. i think it's hard to say what is 55 high, is 60 high, is 80 high, is 40 low. i think that gets into a dynamic conversation. because in the u.s. economy it's so diversified that we have winners and losers. so if you are a service company, $40 is terrible. and if you are an employee of a company that has to do layoffs because of the boom-bust problem think about the towns in north dakota that built -- that
thought this was forever and built schools and built hospitals to support these new communities that all of a sudden didn't exist before because of all the oil workers and then prices fall, production falls, first rates. only 500 rigs now. so all those employees are gone and now you're left with a school you built, a clinic you built, a hospital you built for nothing because there's no community there. you have a lot of dynamics. on the other side the consumer is paying less for gasoline. our food prices go down because trucks are using cheaper gasoline. so you have all these petrochemical. manufacturing can come back. that is high energy intensive manufacturing. so i can give you the winners and losers outside of the extremes. as far as government policy i think there's been a lot of discussion because we've been going through an interminably long political environment of discussion on energy that a lot of it had nothing to do with reality on both sides. so we operate in washington in one of the worst energy conversations i can think of
because it's entirely detached from anything to do with reality because it's all on the extremes. it's all about if you talk about renewables then you are portraying a war on fossil fuels. if you talk about fossil fuels then you're a naend that'll who doesn't understand the value of renewables. and that's essentially the dichotomy when in reality it's insane. everything is growing, right? texas is our oil -- traditionally our oil-leading state. it is also our wind-leading state. last november we had nearly 50%, somewhere in the mid 40% of all electricity power generation was from wind in texas. it's not in oregon or washington state. this is where we're going. we're going to a much more diversified economy in energy
that the policy will have effects on. so you can roll back, which i expect they will, a number of the regulations. i just think that what people are told will be the impact is far from reality. coal ain't coming back because coal is not dying in america because of -- or declining radically because of regulation. it's declining for the same reasons we don't have vcrs anymore. it's because we have a shale gas revolution that displaced coal. and when you talk about that for example on policy, we saw a huge anybody of coal power plant retirements over the last several years. nobody's building new ones. >> will renewable continue growing if we trim the subsidies? you actually believe that? >> first of all, i didn't say renewables. i think the competition of coal is gas much more than renewables. this is another example in the middle. people want coal to come back but they also want to drill more. you drill more you're going to have cheaper natural gas which means coal will decline even further. on the liberal side there's a
problem with the math as well. the reason we have lower emissions and lower coal is because we frac more. sow can't be against fracking but also celebrating the reduction in emissions from the reduction of coal. they go together. >> you just described the environmental left. they oppose coal and fracking. >> my point, ben, is that both sides, the left and the right, demagogue to the extremes but the reality of energy policy to your question of how much policy will be there -- will be able to affect it, i don't think very much. you can open federal land leases for drilling. i don't -- and people can take the leases. i don't believe you will see any drilling, though. because as long as we're at $55 a barrel or 52 for wti, you're not going to see a lot of drilling because of the price. not because of ideology. so i think that there is some that the federal government is
going to be able to do on policy but not as much as either side believes the government is able to effect. >> over to the gentleman here in the second row. >> my name is gustav. i'm from waequatorial guinea. i want to ask you about the model. i pd government. what is the u.s. going to do when you have countries like equatorial guinea, which have been devastated by this -- the lowering of oil pricing to now they're desperate in selling uranium to north koreans. and when you bring that to the attention of the u.s. government, people say, well, i was involved with equatorial guinea before oil was even discovered and it's interesting to see the shifting winds when you tell people that this country now is resorting to desperate measures which are
contrary to vital national security interests. it seems as if the national security interests you're talking about the u.s. is flat-footed so when you have mend or boko haram or these other terrorist actors out there, i find it deplorable that the u.s. is neglecting the gulf of guinea region and hoping that people like tito urbane are going to go away. they're not going to go away. >> i think it's a great question. i agree with some of wyo flat-footedness and the ignoring of the gulf of guinea. here's where i think we have to sort of match a number of different issues here. one is governance. because i agree with you. the resource curse is a governance resource curse. right? because norway doesn't have a resource curse because it uses its resource in a very smart effective manner. the government of guinea is not equatorial guinea, though. let's stretch it up all the way from angola to cameroon, right?
the problem there is we have a bad governance that had no savings during the good days. and all of a sudden a whole bunch of people in opec are getting together and saying oh, my god, it's a crisis. and these guys are looking at them and saying are you kidding me? it's a crisis? you have 500, 600 billion dollars sitting in reserves, i've got 2. i'm in crisis, not you. me to cut production from angola, you've got to be kidding me. one, governance has to change in these countries. we tried. we tried through a number of outfits. it's very hard for the united states to come in to each country in this world and say you have to change the entire dynamics of your country. we say it. we try. we put in some resource to it. but that's very difficult. where we've looked at the gulf of guinea is more on the security side because i was very concerned about the fact that we'd have a copycat from east africa and the delta violence in
nigeria would spread around. so we tried to do joint exercises and look at how we could do that. but i agree with you. if the oil price environment doesn't change from $55 a barrel upwards we are going to have by the end of 2017, we will have social unrest, civil unrest. we will have return to civil war in countries around the world. i agree with you. i believe that. i've written every memo i can on that. for the next -- for my team now and for the next team. don't ignore it. you talk about equate ovrial guinea. i worry about angola. i worry about angola. because it's the triple whammy of low oil prices, the lower investment as a result, and foreign companies therefore employing fewer people because they're producing less and because the output is less. so the projection of where production was going to be is going down, and that's the danger. and if there's a hidden social
contract between these non-democratic regimes and the people essentially saying i know i don't live in a democracy, i have to accept your regime, but at least i need my day-to-day life to be normal. but the first thing that goes when the money goes away from oil production is the investment in the infrastructure. sought roads fall apart. rainy season's gone. the road doesn't get rebuilt. no new hospital, no new clinic, no new medicine. the schools gone. the new village that i was promised is gone. the electrification rate for villages is not there. so now i say now i have a bad regime and i'm not even getting the basic services i'm getting, that is a recipe for disaster. that's why going back to the previous question, my national interest is not about what does this do for the u.s. economy but what does this mean for stability around the world. and that's why this is a very delicate balance. i don't control oil prices. i don't believe in governments controlling oil price. but i have to deal with the fact
i have governments around the world that did a really terrible job at managing the boom days and now they're dealing with the bust days. if this continues it's going tieb disaster. but the opec decision has an impact on them even if they're not members. if the u.s. production shoots up because we artificially increase the price of oil through opec press releases, then what will happen is we're going to have a much faster increase in production in the united states than would have been allowed under a normal market condition. which means that the boom of $355 to $60 in a year from now, even two years from now, will go right back down to $40. and then the countries you're talking about go right back into crisis. and that's the problem i have with opec's decision. it's the panic of that decision that undermines the free market of the oil market and accelerates the boom-bust, boom-bust process that devastates these countries. that's my concern. they should have taken a deep breath. we don't measure oil prices and
cycles based on a day-to-day basis of checking, you know, the bloomberg terminal and seeing what the price of oil is. you look at it on an annual basis, two-year basis. not what was it last month, oh, look, we're celebrating, the opec deal is working. why? because two weeks ago it was at 52 and now it's at 55. come on. that's how you take care of that problem. that's why it's a concern. >> thank you very much. i think we'll have one final question and then close. but the gentleman in the back with -- yes, you. >> thank you both for a great presentation. dr. zycher, this is a question primarily for you. i'm very interested in the comment you made in your opening remarks about the bid on disruptions and the idea of a cartel optimum result. a couple things, maybe if you could expand a little bit more
on that, it's a very timely remark in the wake of yesterday's arab separatist bombing in iran of about 500,000 barrels a day of pipeline capacity. to what extent do you expect to see it? and maybe as a follow-on point to what extent does a rising price either increase or decrease the dynamic that you described? thank you. >> it's a really good question. i haven't really -- i'm just starting a paper on this topic. one problem is getting data on supply disruptions is actually surprisingly difficult. particularly before, around 2010, 2008, something like that. but it's pretty clear to me that any given oil producer has an incentive to see others cut their production or to prop prices up. it's a standard result. and a world in which many oil producers are not exactly the most scrupulous characters that
we've ever run across, it's easy to believe that you get a market for disruptions in which terrorist groups and others are subsidized to bomb pipelines and bomb terminals and do various nefarious things in order to prop prices up. and the result of that sort of a market is that you get a permanent increase in prices. and the question is can we measure that effect? i mean, supply -- unplanned supply disruptions that are not simply accidents, pipeline leaks has to be shut down for a while but real bombings, just things like that, are a ub iktdous feature of the world oil market. they simply are. and it's impossible to believe that there's not a decentralized market for that. i'm not saying there's some conspiracy or something. that's all i'm saying. but it's basically like the wheat market. you get this -- you get people
engaging in this activity in order to prop prices up on a permanent basis. and the question is how big is that effect? it can't be zero. it must be something. and i think no one's really thought this through very carefully at all. and i plan to try and examine that issue. but i think the effect is not trivial. >> can i ask alau're saying it' conspiracy per se. it's not as though the saudis contracted with the arab separatists to prop prices or impair iran's revenue. >> you don't have to assume that. >> the opportunity presents itself because the market is suddenly below its equilibrium disruption. >> it's below sort of the cartel optimum price. and so you would think there would be an incentive on the part of someone to arrange a bombing somewhere that will end in -- i think that if i'm right that the opec price now at around 55, 57 bucks tends to get eroded over the next couple of years, i think amos agrees with me on that. if i understood his comments
correctly. then you would expect to see an increase in supply disruptions as a proportion of the total -- of total global production as a process of propping the price up above where it otherwise would be. it will be interesting to see if that happens. but i'm just starting, and i've got lots of papers i have to write, but this is one of them. and just getting the data on supply disruptions going back let's say to the 1950s is surprisingly difficult. so we'll see. >> but kevin, you know, i live in the oil business. so i live in conspiracy and shadow econ areas quite regularly. pipeline bombings have become a much more localized method of grievance than it has broad market. part of the reason for that is first of all, we had 100 in 2011, 2012 in southern iraq. we had a ton in afghanistan and
pakistan. the egyptian pipeline system has been bombed 32 times since 2011. so this has become a sport. the result, though, is that the actual repair time from 2011 crisis of bombings of pipelines to today, it went from weeks to days. and unless you bomb the pump station or something like that, which is a much more significant event, bombing pipelines is very easy. you have thousands and thousands and mouds thousands of miles of a black pipe sitting on top of sand and you can ram it with a truck, you don't even have to bomb it for the same result. but fixing it has gotten very easy, very fast. you can get it fixed sometimes in three days. so i actually see the bombings of above-ground pipelines as much more of localized grievances a la what's happening in nigeria and iraq where i don't like what the central government's doing, i'm sending you a message, i know you're going to get it back but i can
hurt you. and you see it in turkey a lot. there's a lot of concern about the yaz pipelines in turkey. it's not a method of long-term pain, and therefore i don't think it affects the oil price ultimately all that much unless it's a massive pipeline or a subsea pipeline or something like that that can actually have lasting effect. >> thank you very much to you both. and thank you as well to the viewers on c-span and you all for coming today. thank you very much. [ applause ] on tuesday the senate intelligence committee looks at russian hacking during the 2016 presidential election and other intelligence activities. those testifying include national intelligence director
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