Interview with Yergin

SPIEGEL ONLINE - July 18, 2006, 05:07 PM URL: http://www.spiegel.de/international/spiegel/0,1518,427350,00.html
THE WAR OVER RESOURCES
"Energy Security Will Be one of the Main Challenges of Foreign Policy"

In a SPIEGEL interview, United States oil expert Daniel Yergin discusses fears of a global energy crisis, the growing confidence of oil-rich nations and changes in world politics caused by rising energy prices.
Spiegel: Mr. Yergin, Europe is dependent on Russian gas, Venezuela and Bolivia nationalize their oil industries, Iran threatens to use oil as a weapon. How secure is the world's energy supply?
Daniel Yergin: We are living in a new age of energy supply anxiety. A premium in the oil price of somewhere between 10 to 15 dollars a barrel reflects this heightened anxiety. What we see is the rebirth of 1970s-style resource nationalism that is riding on this crest of high energy prices. The balance of power has changed, the exporting countries are in a much stronger position today.
Spiegel: Would Venezuelan President Hugo Chavez or Russian President Vladimir Putin act so self-confidently if a barrel still cost only 20 dollars?
Yergin: Probably not; their position has changed dramatically. Just a little more than half a decade ago the oil businesss was the oldest of the old economies, all governments were tending to privatize their state oil companies and tried desperately to draw in capital. They needed the money and the technology. Now, the tables have turned, the producers have the high cards.
ABOUT DANIEL YERGIN

DER SPIEGELDaniel Yergin, 59, has been known as the "Energy Pope" since the 1991 publication of his book "The Prize: The Epic Quest for Oil, Money, and Power," which won him a Pulitzer Prize. The author and businessman is chairman and co- founder of an international energy consultancy. Spiegel: What is the consequence of this shift in power?
Yergin: We are living in a different world now. You can see it everywhere in international relations: It was noteworthy that, after his visit to Washington, the Chinese president's next stop was Saudi Arabia. And the first state visit made by Saudi Arabia's King Abdullah took him to Beijing. There is a significant re-orientation. The Russians are turning east to the Chinese -- to the Europeans' surprise. It always seemed to me that the relationship between Russia and China would shift from being based in Marx and Lenin to being based in oil and gas.
Spiegel: China seems to conduct its foreign policy for the sole purpose of covering its enormous energy needs. How probable is a conflict between China -- tomorrow's superpower -- and the superpower of today, the US?
Yergin: Well, if I had the time to write a political thriller or a movie script, that would be a great plot. Though, I think the reality is not as dramatic. It is not a zero-sum game. The Chinese are new players in the world economy and they have a high degree of urgency to obtain resources. It would be much more worrying if they were sitting on hundreds of billions of dollars in their central bank and not spending the money to add barrels of oil to the world's supply.
Spiegel: But the Chinese use different standards when they compete for exploration projects. They even offer weapons, something a Western firm naturally can't do.
Yergin: It may be equipment, it may be railway systems, it may be construction projects. But look at Angola: The Chinese spent a lot of money to get in there, but they are among many other companies. It is a much bigger game. In a couple of years, the Chinese will be seen as regular participants in international industry. Their companies have to report to shareholders as well as to the Chinese authorities. They need to make money, they have to be efficient. Clearly, the Chinese need the resources, but I don't think they want to clash with the industrial world which happens to be the market for their goods.
Spiegel: But the Chinese hunger for oil makes the world market tighter than ever. How can the oil suppliers satisfy this rising demand?
Yergin: I think the shock of demand from China has passed now. In 2004 we had this amazing 16 percent growth in Chinese consumption. But now the focus is shifting to supply. We are currently experiencing a slow-motion supply shock, the aggregate disruption of more than 2 million barrels per day. This has a lot to do with the unrest in Nigeria, but also with the production loss after the hurricanes in the Gulf of Mexico, the decline in Iraq since the 2003 war, and the decline in Venezuelan output since 2002. So today we're standing at a historic juncture: After a quarter century, the great cushion of oil surplus production capacity that was created after the turbulences of the 1970s has been largely spent.
Spiegel: Is the current scarcity just a question of capacity or also one of geology? There are quite a few experts who believe that global production will reach a peak soon and decline fairly rapidly.
Yergin: This is not the first time the world has run out of oil. It is more like the fifth. Cycles of shortage and surplus characterize the entire history of oil. We experienced similiar fears in the 1880s, at the end of World War I and II. And we ran out in the 1970s. People always underestimate the impact of technology. To give you an example: In the 1970s the frontier for offshore development was 200 meters, today it is 4,000 meters.
Spiegel: But even the most sophisticated technologies have not been able to stop the decline in fields like the ones in the North Sea.
Yergin: The North Sea was supposed to run out in the 1980s. Then in the 1990s. And now production is still on-line. Nobody thinks that oil supply is infinite, but the point is: The sky is not falling. We have done a worldwide field-by-field-analysis of exploration projects, which indicates that the production capacity could increase by as much as 20 to 25 percent over the next decade, including greater output of nontraditional sources like Canadian oil sands, and increased recoverability from existing wells.
Spiegel: So the whole idea of peak oil is nonsense?
Yergin: The image is misleading. A more relevant description would be a plateau in production capacity that might be reached in the fourth or fifth decade of this century. So the major obstacle to the development of new supplies is not geology but what happens above ground: international affairs, politics, investment and technology.
Spiegel: Isn't it getting more and more difficult and expensive for oil companies to find new resources?
Yergin: Absolutely. The offshore oil costs went up 68 percent since 2000. And there is also the bottleneck in human resources: We had a CEO of one of the supermajors speak at a conference in Houston, and just as he finished speech, he said with a smile "Would everybody please leave their resumes by the door!" But eventually it's a question of access: Getting access to fields is on top of the oil companies' agenda. We see a substantial build-up of supply occurring over the coming years. But, after 2010, that growth is concentrated in a fewer number of countries, this is what is causing the unease and is accentuating security concerns.
Spiegel: Because it makes consumer countries more dependent and vulnerable.
Yergin: The importers really need to think about how to manage the energy security question. Inevitably, there will be new shocks to the market. Some disruptions may be roughly foreseeable, such as coordinated attacks by terrorists or turmoil in Latin America that affects the output. Some may come as a surprise: Nobody anticipated the devastation the storms would wreak on the facilities in the Gulf of Mexico last summer.
Spiegel: What can the industrialized nations do to ensure energy security?
Yergin: First, we have to find a common vocabulary for energy security. This notion has a radically different meaning for different people. For Americans it is a geopolitical question. For the Europeans right now it is very much focused on the dependence on imported natural gas. The starting point for energy security today as it has always been is diversification of supplies and sources.
Spiegel: What does that require?
Yergin: It means investing in new technologies. It's extraordinary how inventive one can be with ethanol right now. Within four or five years the US might be getting 10 percent of its gasoline from ethanol -- that would be like creating a new Indonesia. Even Silicon Valley investors have put well over a $1 billion in new energy technologies. But that's not enough: To maintain energy security, one needs a supply system that provides a buffer against shocks. It needs large, flexible markets. And it's important to acknowledge the fact that the entire energy supply chain needs to be protected.
Spiegel: NATO's Secretary General, Jaap de Hoop Scheffer, said that as far as oil and gas is concerned, NATO could play a role to defend the sea lanes. That sounds a bit scary.
Yergin: It reflects the recognition that there are a number of chokepoints along the transportation routes of seaborne oil and liquid natural gas that create particular vulnerabilities -- like the Strait of Hormuz or the Suez Canal. More and more oil and gas is transported across borders or oversea. Every day some 40 million barrels of oil cross the oceans on tankers; by 2020, that number could jump to 67 million.
Spiegel: This kind of security isn't cost-free.
Yergin: Securing pipelines and chokepoints will require increased monitoring as well as multilateral rapid-response capabilities. Both the private and the public sectors need to invest in building a higher degree of security into the energy system.
Spiegel: In the end the supply with oil and gas is more a question of diplomacy rather than business?
Yergin: In a world of increasing interdependence, energy security will depend much on how countries manage their relations with one another. That is why energy security will be one of the main challenges of foreign policy in the years ahead. Oil and gas have always been political commodities. But right now, it is more political than it has been for years.
Interview conducted by Alexander Jung and Georg Mascolo.