James Glassman: Energy prices have been rising sharply, partly because of Hurricane Katrina and Hurricane Rita. We decided to talk to probably America’s number one expert on energy to try to separate some of the hysteria and the myths from the truth.
Dan Yergin is the Chairman of Cambridge Energy Research Associates. He’s also a Pulitzer Prize winner for his book, “The Prize: The Epic Quest for Oil.” He’s also the author of “The Commanding Heights: The Battle for the World Economy,” which received wide attention for analysis and narrative and was made into a six-hour documentary by PBS. And he’s also the recipient of the United States Energy Award for lifetime achievements in energy and the promotion of international understanding. Dr. Yergin received his BA from Yale and his Ph.D. from Cambridge University.
Dan, Speaker of the House Dennis Hastert today said that he wanted to pass a law that required oil companies to reinvest their profits in increasing refinery capacity in the United States. What would the impact of increasing refinery capacity in the United States be?
Dan Yergin: There is a tendency to think that the refining problem is a U.S. problem, that we don’t have enough refining capacity. The problem is a global one and it is really more concentrated in Europe and in Asia and we are feeling the impact of it. In Europe, half the new cars sold are diesel and they don’t have enough of what is called conversion capacity in the refineries to turn out that fuel and there is also rising demand in China for that type of fuel. So that’s what really put the pressure on the refining system. In the United States we could certainly use expanded capacity to process difficult crudes, although we are kind of the world leader in that as it is.
The big problem is not a lack of cash; it is the regulatory and permitting process that makes it very difficult to do almost anything new and significant in refineries and certainly makes it almost impossible to build a new refinery.
Glassman: Speaker Hastert has called on oil companies to invest in America’s energy infrastructure but hasn’t Congress kept the hands of energy companies tied to some extent by limiting their ability to develop domestic resources?
Yergin: Yes, the capital is there to invest. It’s a question of access and opportunities. You see enormous sums, billions of dollars go into the off-shore Gulf of Mexico because you can drill there. You have seen astonishing improvements in technology. But there is no point drilling where there are no oil and gas resources, and we do also have a lot of resources that are closed off, for instance, off the east coast. I mean it is a strange situation. We can drill off the Gulf Coast but not off the East Coast and yet there may be very extensive resources as well.
Glassman: There is a great deal of concern about rising natural gas prices — something that Federal Reserve Chairman Greenspan pointed out in 2003. We have seen prices go from $3.00 a little bit before he made his speech to $13.00 or $14.00 today. Some people believe – including, I think, Chairman Greenspan — that it’s not just a question of developing U.S. resources, but being able to import foreign resources which we can’t do now with a lack of LNG terminals. Are those LNG terminals — liquefied natural gas terminals — going to get built?
Yergin: I think that we have gone from plans and proposals for just a few natural gas re-liquefaction facilities to literally dozens, and we think that at least four, six, something seven like that — maybe eight — will end up being built and that we will have the capacity to import LNG. The big question, of course, is where are they going to be built? Are they going to tend to be built on the Gulf Coast, or will they be spread out? And will at least one or two of them be on the East Coast, which is near the demand centers, near where people are heating their homes with natural gas? And that is a question not of national politics but of local politics.
Glassman: The statement that Speaker Hastert made just recently was perhaps in response to growing sentiment on the Democratic side for a windfall profit tax on oil companies. This has been tried before. Is it effective at reducing oil prices?
Yergin: What a windfall profits tax does is introduce a lot of distortions. It reduces investment, it increases a sense of political risk and it doesn’t achieve the goal that is intended, if it is to facilitate investment in new sources. It obviously responds to a political demand, but it has the opposite effect of increasing supply. It really will lead to decreased supply, not only here, but it will be something that will have an impact around the world. And this is a time when you want to increase and encourage investment, not provide disincentives to investment.
Glassman: There is a lot of the use of the term ‘energy independence’ in Congress. Is it possible for the United States to stop using foreign oil and turn to domestic resources? What does energy independence mean exactly?
Yergin: You know, that is something that I have puzzled over. It has been part of the political lexicon now since the 1970s. For a long time, during all this period when we have been talking about energy independence, our oil imports have gone up from being about a third of what we import to close to 60 percent, and will probably continue to rise as our consumption rises. And we are entering into the era of where we have built an enormous amount of new natural gas demands in terms of electric power usage — building lots of gas fired electric power plants — and we will be importing much more natural gas in the form of LNG. What we need to do is say, well, how do we manage our role in a global economy in terms of energy, make sure we have diversified sources to make sure that the development is going on around the world that we can call upon, and also trying to reduce unnecessary regulatory barriers or delays, which is so characteristic of the system of development in the U.S., so we can maintain a vibrant, domestic industry; but recognizing that we are part of this larger picture and pursuing all those other things like alternatives and renewables and certainly conservation.
Glassman: If we were less dependent on foreign sources for oil, let’s say, would the price of gasoline drop?
Yergin: Really there are two things that will determine the price of gasoline. One is how much spare production capacity there is in the world. In other words, what is the balance between the ability to produce oil and consumption? Right now it is very tight and that is the number one reason that we see these high prices. The second reason is the lack of the kind of what is called deep conversion capacity in refineries to make the type of products like diesel fuel that the world increasingly wants. So those two things are interacting. If our demand went down, if we became more energy efficient — which I think is a highly desirable goal — that we get more miles to the gallon and then if that took some pressure off the world market, you know, all other things staying constant, then we would see lower prices.
Glassman: So there is a lot of political pressure building and you have heard about a windfall profit’s tax or Senator Lieberman is trying to get energy independence from foreign oil and now we have heard about what Speaker Hastert wants to do. I mean, what would you do in response to this political pressure? Is there anything that can be done on the public policy side?
Yergin: I think that there are two things that we can do as we are heading into the winter that would be significant. The first thing is that we really ought to make sure that people really have the information and the knowledge about the minor changes in behavior that they can make that will not only save them money but in a total sense would reduce natural gas prices and take the pressure off. If all of us this winter reduced our thermostats by two degrees, homeowners, commercial establishments, we would save more natural gas than has been lost because of Hurricane Katrina.
The other thing we ought to do is not wait until a cold winter, if we do have a cold winter, and address now how to build flexibility into some of these environmental regulations so that for instance, in an area where a utility is only allowed to burn oil four days a months, perhaps in January if there is really pressure on prices they can burn oil eight days a month and reduce their consumption of natural gas. And there is no shortage of residual fuel oil, the type of oil that does get burned in utilities, so it wouldn’t add to the price pressure on oil but it would take pressure off natural gas.
Glassman: Well thank you very much Dan Yergin.
As you can see, Dan Yergin is separating the myths from the reality. The political overreaction could actually be counterproductive when it comes to trying to solve the problems of energy. In fact, it’s fairly straightforward — the best way to get energy prices down is by increasing supply, to some extent reducing demand, which happens anyway in response to higher prices. But how do we increase supply? Not by political intervention. That disrupts capital markets, makes investors think, well, maybe putting money into energy companies is not the best use if there’s going to be political repercussions to doing that. So, perhaps Speaker Hastert, Senator Lieberman, Senator Dorgan, and others who are responding in an earnest, and heartfelt way to the complaints of their constituents about higher oil and gas prices, are really doing exactly the wrong thing. We need to make markets work. That is Dan Yergin’s advice. Sounds sound to me.