[MUSIC PLAYING]
MARK BLYTH: My
name is Mark Blyth.
I am the director of the Rhodes
Institute for International
Economics and Finance
at the Watson Institute
of Brown University.
I recently did one
of these web chats
with Ed Steinfeld who is
the director of the Watson
Institute talking
about the coronavirus
and sort of the
effects on the economy
and those sorts of things.
We decided that worked
quite well so let's talk
about something else,
which has been in the news
and also makes
little sense and has
upended all of our
expectations, and that's oil.
And luckily, we have on
faculty, Professor Jeff Colgan,
who is an
international relations
scholar of some renown
who also happens
to be one of the few people
who really, really understands
the sector and the
geopolitics therein.
So looking forward to having a
good conversation about that.
So Jeff, let's get
started, shall we?
You're ready?
All right.
Let's get started with this.
I posted something on
Twitter just the other day,
which was a very
short thing that
said, well, that's unusual,
and that was negative oil.
Can you walk us through how
you get to negative oil?
Let's use that as
our starting point.
JEFF COLGAN: Yeah.
It's been a crazy last couple
of months for the oil markets.
Generally, we've
never seen oil prices
go negative before in basically
a century and a half of the oil
markets, but I think of this
as sort of three crises at once
for the oil markets.
There was the first phase
of the coronavirus in China,
which hit world oil
demand very dramatically.
I mean, demand in China,
but that ultimately
means world oil demand.
The second phase was a
spat between Saudi Arabia
and Russia, or more
broadly, the sort of OPEC
plus group of countries
that were trying
to prop up the price of oil.
And then, they started to
disagree starting on March 9th,
and that led to another
drop in the price of oil.
And then the third phase being
once the lock downs were really
in place in both Europe
and North America
where you got this huge
shortfall in demand.
So they're talking, if you
think about the whole world oil
market as about 100 million
barrels a day of oil,
a drop of like 20 to 30
million barrels per day.
And so even though there
were some productions kept
happening, it wasn't enough
to compensate for the fact
that we now have so much oil
production supply and not
enough consumers for it.
And that means that
we get to this point
where producers don't know where
to put the oil that they're
producing.
They can't stop
production easily
because it damages
an oilfield to do
a sudden hard stop of oil
prices, of oil production
rather.
And so you get into
this weird situation
where the producers are
actually paying others
to store the oil that
they're producing,
and that gets you
negative oil prices.
MARK BLYTH: But is
this going to persist?
Is this something
that we're going
to continue to see because
it's very difficult to build
another Oklahoma storage
facility overnight,
and it's not clear that the
airlines are coming back
anytime soon.
So should we expect this
to persist, and if we do,
how significant is that?
JEFF COLGAN: Well, I think
we should expect low oil
prices to persist.
Probably not negative
ones, in a certain sense
that there was a really
weird technicality associated
with the day.
It was only one day where
prices went negative,
and it had to do with
futures contracts
rolling over to actual
physical delivery.
Now, we might see you
know another day or two
of that in the future
at those moments when
the contracts change,
but generally, I
think we should expect just
low oil prices for some time.
As you say, demand is
going to be depressed
for a while, and of
course, how long it's
going to be depressed is the
$64 trillion question right now.
Nobody knows, but
it seems as though
that that stretch of low prices
is going to last for a while,
and that's going to cause
a lot of economic pain
for oil producers in this
country and around the world.
MARK BLYTH: Let me just say to
everyone who's listening in,
first of all, welcome
if you've just joined.
I know some people
are joining us now.
The Q&A is actually open--
we're using Zoom
as the platform--
if you have access to that.
We also have people
watching comments
on YouTube and
other such things,
sort of doing YouTube Live.
So if you got any questions,
put them up there,
and we'll try and get to
them in the latter half
of this broadcast, which is when
we'll open this up to Q&A. So
just putting that in there.
Now let's get back
to what you were just
saying there, Jeff, right?
One way I'm thinking
about this is
you have the Fed, the Federal
Reserve, basically propping up
asset prices everywhere to stop
a complete financial collapse,
and therefore,
the stock market's
rising at the same time the
unemployment is skyrocketing,
which is a rather weird one.
In a sense, is the oil
price a better indicator
for the true state of
the health of the world
economy than anything
else at this point
in the sense that
it went negative,
and there's a lot of
information in that?
Is it more than just a
technical blip in that sense?
JEFF COLGAN: Yeah.
We're getting sort
of, as you say,
this very strange constellation
of signals, right,
where the stock market seems
to be doing relatively--
MARK BLYTH: OK-ish.
JEFF COLGAN: --OK, right?
MARK BLYTH: If you thought the
Fed's going to buy everything,
why not buy it, right?
JEFF COLGAN: Right, right.
Where if you compare
to a year ago,
the stock market is only
down just a little bit
whereas unemployment
is just awful,
and I think that's actually,
probably to my mind,
one of the better signals.
But also as you say, oil
prices is a good one.
I think negative oil
prices is unusual.
It's kind of a freak occurrence,
but the massive reduction
in demand, that's a true signal
of what we're seeing right now
and what we can expect at
least for a couple of months.
MARK BLYTH: So let's talk
about different countries,
different economies, the ways
in which this impacts them
in different ways.
We've mentioned the US.
You've basically
got the shutdown
of the shale producers.
They're basically being
very hard squeezed on this.
What's the story
for net importers?
Let's start with the EU.
What's happening
there because of this?
Is this a burden?
Is this a problem?
How does it work out?
JEFF COLGAN: Well, it will
benefit net importers including
in Europe, other than
Norway, of course, which
is a big exporter, but most
of Europe is net consumer,
and the trouble is right
now, everybody's in lock down
in Europe, and so you can't
take advantage of those lower
prices.
But I think once, and
we're seeing already
even starting this week,
European countries coming out
of the lock down,
then there will
be sort of an updraft for the
economies of those countries
from the lower oil prices.
MARK BLYTH: Would the same true
of the east Asian economies
as they come out of lock down?
JEFF COLGAN: Absolutely.
So China in particular is
going to benefit from this.
It's a very heavy oil consuming
country, big net importer.
Same with Japan,
Taiwan, and elsewhere,
so they will definitely benefit.
MARK BLYTH: So what about
the producer countries?
You mentioned Norway, but let's
talk about the Middle East.
What happens to those
guys in particular?
JEFF COLGAN: Yeah.
So the Persian Gulf, of course,
is going to be very hard hit.
This is very bad news for
net exporting countries,
and in particular,
not only the countries
that are pumping heavily just to
meet their government's budget,
but also the ones that don't
have a lot of fiscal reserves,
right?
So that's a double whammy
because then they're
going to run a big
fiscal deficit,
and they've got no cushion
in terms of a piggy bank.
And so--
MARK BLYTH: Which countries
are you particularly thinking
of falling into that bracket?
JEFF COLGAN: Yeah.
Thanks.
So in particular Algeria, Iraq,
Nigeria to a certain extent,
Angola heavily--
those are some of
the big countries
that I would be worried
about not only economically,
but even politically, as
the unrest starts to unfold
and because of the
economic consequence.
MARK BLYTH: So how does this
play out in Latin America
because you've got--
they are commodity
exporters par excellence?
Brazil invested heavily in
these offshore deep well
issues over the past decade.
Is it the same story
for those guys?
I mean, basically, is it kind
of the same problems writ large
in a different continent?
JEFF COLGAN: Yes.
Ecuador is already
applied and basically said
that they can't pay their
debts and applied to the IMF
for help.
Venezuela is a
continuing ongoing mess,
and other producers,
Brazil and Argentina,
are actually smaller
oil producers,
but they had made bets
on being able to produce,
and it's going to be very
tough times for them as well.
MARK BLYTH: And in a way, just
to pull back for a minute,
it gives us a really
interesting way
of thinking about globalization.
We tend to think
about globalization
in terms of trade, in
terms of financial flows,
but there's also these very
basic things like oil flows
and then the revenues
that come from this.
So what starts as a kind
of supply shock in China
and becomes a demand shock
everywhere else as we
withdraw becomes this absolute
catastrophe for these commodity
dependent countries
that, as you say,
have no real budgetary
reserves, need
to earn dollars to do basic
imports, and already--
Latin America is
the best example--
were in deep trouble already.
So there's very large
repercussions coming from this.
JEFF COLGAN: Yeah, and it has
these sort of ripple effects,
as you say it, kind of all
the way around the world where
suddenly the Federal Reserve
and other central banks
are worrying about the kind
of stability effects of having
many countries in Latin
American and Africa
that are in deep financial
trouble because of that.
There will be some.
It's not all negative
because there
will be some
positives in the sense
that the price of fertilizer
for agricultural products
is heavily linked
to the price of oil,
and so for many countries that
are producing coffee beans
or bananas or whatever it
is that they're producing,
this is going to be of
benefit down the road,
but that's going to take
some time to play out.
MARK BLYTH: Right.
So even though they're losing
revenue on the front end,
you get cheaper
inputs on the back end
so it's going to see a
redeployment of capital
rather than, if you will,
it's complete collapse
if we get lucky.
Let's try and accentuate
the upside of this.
The air is fresher.
You can see the arch in Delhi.
All the aircraft are grounded,
so that's a large chunk
of emissions gone.
What's the environmental
story on this
because there's got to
be a short run, long
run on this as well?
Short run, you're
encouraging more use,
but you can't actually do it
because we're all locked up,
but eventually, you
would hope to get out,
and then, that will
encourage more.
It seems to be structurally low
because there's so much supply
out in the market just now.
Does that get us
farther along the road
to dealing with climate change,
or does it hold us back?
JEFF COLGAN: Yeah.
So with Earth Week
just last week, I'm
glad you're bringing
this up, and I
think you're absolutely right
on both the sort of short term
and the long term.
The scariest thing that
we are starting to see,
though, is that some
of the oil producers
faced with that problem
that I was mentioning
at the beginning of having
nowhere to go with their oil,
there's at least some reports
now coming out of Russia,
and this might
become a thing for US
as well, where oil
producers are actually
burning their oil rather than
leaving it in the ground,
right, so which is, of
course, from an environmental
perspective, just a total
disaster in the sense
that we're in a point
where we're already--
MARK BLYTH: But hold on.
Why would you do that?
JEFF COLGAN: Yeah, so this--
MARK BLYTH: Why not just
leave it in the ground, right?
I mean, why do you
have to burn it?
JEFF COLGAN: Yeah.
It seems so crazy, but
it really is this idea--
I mean, I think intuitively,
we have this sense
that oil fields are like
a wine bottle, right,
and you could put a cork in
it and come back to it later,
and that's not the
way oil fields are.
That you have to
keep the pressure up.
If you do a sudden stop to them,
you damage them, and therefore,
lose the kind of revenue stream
going forward because you've
now damaged your oilfield.
And so--
MARK BLYTH: Absolutely.
JEFF COLGAN: --you're making
this long term trade-off
there as well where a
producer might decide, well,
if I keep producing now,
burn it up or do whatever
I need to do, then in the long
run when oil prices recover,
I'll still be able to sell
this stuff for a profit
down the road.
MARK BLYTH: So
there's the question.
I mean, none of us know
exactly what the growth
trajectory of the
future is going
to be locally or globally,
but is this one in which oil
is increasingly written
out of the script,
or is it one that oil now
has an unexpected comeback?
JEFF COLGAN: Yeah.
So I think the story
right now is all--
the headlines rather, are all
negative on oil producing,
and that's right
that they are going
to face a heck of
a demand shock,
and it probably will help
people change their view
about the attractiveness
of renewables.
But there is a
countervailing force
as we've said on so many of
these topics in that, as you
know, electric vehicles compete
with internal combustion
engines, and when
gasoline is cheap,
it makes the conventional
cars a lot more attractive
than their hybrid or
electric vehicle competitors.
MARK BLYTH: But all
of that, of course,
is contingent upon in a sense
the global economy coming
back pretty much as
it was before, right.
So the Germans will
make BMWs, and they'll
sell them to the Chinese.
They'll make them here and
sell them to Americans,
and other countries
will consume them,
and they will export
them, et cetera.
It's not clear, particularly
if this continues
through multiple
waves of the virus,
that those types of
growth models if you will
on those traditional
industries are
sustainable over the long run.
So I'm thinking particularly
of oil just as a business,
can't it go bust?
I mean, can't it
ultimately just go bust
because nobody's buying this
stuff, and the cost of capital
is too high relative to what
you get for taking it out
of the ground, and
game's over, right?
JEFF COLGAN: Yeah.
I think that it doesn't
go bust in the short term,
but it might shrink
a lot, right.
So even if we went
from a world where
we were consuming 100 million
barrels a day down to 50,
that's a massive shift in the
structure of the world economy.
That means whole countries stop
producing oil, which include,
could include my home
country of Canada, which has
high cost of production oil.
You could imagine a total sweep
of Alberta and Saskatchewan,
which has got huge political
consequences as well.
But I'd love to ask to get
your thoughts, too, you about
what are the other sectors
that might disappear.
You have to think
about cruise lines.
Who's going to want to be
on a cruise for a while?
Or at least that's what
I think, although I
hear that some people are
buying tickets into the future.
So which sectors do you think
are going to shift the most?
MARK BLYTH: So this
whole thing for me
goes back to one point
I've been thinking
about more and more, which is
what's the behavioral response?
All right.
So there's some
theater that I saw
in a report, which I
can no longer find,
and it's annoying me
because I read on the web.
I'm desperately
looking for this.
But basically, what it said was
if you look at areas of China
where you didn't
have a big shock,
you nonetheless have a
huge behavioral response.
People just aren't
going out as much.
You can open up
the movie theaters,
but it doesn't mean
they're coming back.
And if you have second and
subsequent waves of this virus,
the behavioral shock
might be bigger
than the initial economic
shock where the two of them
will get compounded.
So that's the problem
if we go down that road.
So exactly, you're
right on cruise ships.
I mean, why on Earth did
we bailout cruise ships
because if you
think that there's
a major behavioral
change likely,
it's if you go on this boat
with 1,200 other people,
and one of them gets it, you'll
be stuck in dock for a month.
Do you really want
to take that chance?
So that says to me
that industry's toast,
and yet we went along and bailed
it out, at least in the US.
So let me push this back to you
and then go back to the United
States on this one.
There was an interesting
piece in the Financial Times
by Megan Greene, who's an
affiliate of my center,
on bailing out the oil
industry, and what she said
was no, don't even
think about it, right?
But on the other
hand, if I think
about kind of the political
economy of the US,
I can identify a dozen states--
they tend to be Republicans.
They tend to have balanced
budget amendments, which
means that they're heavily
dependent on current revenues
for spending--
a lot of that-- they are
carbon extractors, refiners,
producers.
Think everywhere from
Alaska to Louisiana, right?
And they're about to get an
awfully big shock because
of this.
So rather than sort
of individual sectors,
it will be interesting
to think through which
regions of the country
are going to be most
upset by this type of thing.
What are your thoughts there?
JEFF COLGAN: Yeah.
North Dakota, in
particular, should
be right at the top
of our mind right--
spare a thought for North
Dakota because maybe it's
good for the climate.
It is good for the climate
if the oil industry there
shuts down, but this
is a terrible way
to do it in terms of the awful
impact it's going to have
on workers and families.
I think Megan Greene's
piece was fantastic,
and it was right on the money.
The political momentum for,
or the political pressure
for some form of oil
bailout, I think,
is going to be very
hard to resist.
I'd be surprised if there
wasn't some form of bailout.
And so then the question
is are there good
or bad ways to do this?
And I think the answer is yes
because we're leaning towards,
at the moment, the
bad ways, which
is to say, OK, let's throw
grants or loans at the oil
companies.
And I would much prefer to see
us investing that kind of money
in the workers and
taking care of the people
and helping to retrain for
a different form of energy
economy in the future because
we can move to an economy that
is much less dependent on
fossil fuels if we choose to.
And why wouldn't we
do that at this point?
I think it just makes sense.
MARK BLYTH: Well,
we would choose
not to do so because the oil
sector is critically important
as it stands to the
welfare, well-being,
and tax base of very,
very important states.
If you want to win the
Senate, or if you want to win
the presidency, et cetera.
So the lowest common
denominator is
bail rather than fail and
then hope that they like you.
So there's a, I would
say, an electoral politics
built into this one.
Let's go bigger.
Let's go macro [INAUDIBLE].
We're getting some very
good questions coming in,
and we'll turn to those shortly,
but let's go macro on this one.
So as a child of the
Cold War and as a student
of international relations--
I did my graduate
work at Columbia,
a student of Bob Jarvis--
I was used to a world
in which there was first
of all, the Soviets.
Then, there was NATO and us
freedom loving countries.
And then, the Soviets
died, came back as Russia.
The United States
is still basically
friends with the Europeans
and the Canadians and all
the other people,
and then, along comes
the Trump moment, right?
Along comes neo-nationalism,
not just here, but globally.
It begins to change it.
So two directions I want
to push on this one.
The first one is
why do I think now
that the United States
has more in common
with Russia and
Saudi Arabia than it
does with the Europeans?
And the second one is
is there not an argument
that all governments will be
making about strategically
important sectors?
So for example,
with airlines, I can
imagine Virgin
going to the wall,
but as we see with the
KLM Air France bailout,
you're going to keep one.
British airways is probably
going to get a bailout, right?
I don't know if cruise
lines fall in to that.
They're not
strategically important.
But your oil sector, surely
that's strategically important.
Are we going to see a kind of
renationalization of these oil
companies back to the old
model of having national oil
corporates, and this is how
we're going to get there?
So let's explore
those two themes.
JEFF COLGAN: Yeah.
So you definitely do see
a triangular relationship
between the US, Saudi
Arabia, and Russia
as the three largest producers
by far of oil in the world.
And so you see
President Trump trying
to organize an
agreement between them.
But I will say, I think
that was wildly over-hyped,
that his role in
particular, the US role
in organizing that
agreement was far overdone
because that probably
would have happened anyway
as the fact is that the US
is a marginal net exporter
at the moment and will soon
become a net importer again.
And so, while it sort
of was temporarily
aligned in that sense, I think
that its long term interests
are going to still be
probably closer to Europe
than the other two.
And Saudi Arabia
and Russia, they
made an agreement
that didn't actually
involve the US at all, right?
The US only promised to
make production cuts that
would be forced on
them by the market,
by the fact that the
prices were coming down.
So they didn't
actually do anything
different than
what the market was
suggesting in the first place.
And now I'm
forgetting, of course,
the second part of this--
MARK BLYTH: The second one's
about the renationalization
of oil and oil
companies because it's
such a strategically important
sector even if you want
to make the green transition.
One of my favorite examples
for this is coking coal.
The steel that you need
for making windmills
has to be done
through coking coal.
All right.
So do you open up coal mines if
you want to get there, right.
We're all still going to fly for
a while, even when this comes
back, perhaps not as much,
which means that you will still
need these types of fuels.
So if they are
strategically important,
do we see in this kind
of neo-nationalist moment
a rebirth of the type of
national oil companies
that dominated the world
in the '50s and the '60s?
JEFF COLGAN: So I think the oil
industry does a brilliant job
often of talking about how
security important it is.
It does this thing called
securitization, right,
where it claims that a strong
American oil industry is
in the vital national
interests of the United States,
and most of that is hogwash.
In fact--
MARK BLYTH: Tell us why.
Tell us why.
Go on.
That's really important.
Tell us why that's hogwash.
JEFF COLGAN: The US does
have an important interest
in being able to supply its
military if it's ever in a war,
right.
So that is important,
but the US military
consumes somewhere
between 2% and 5%
of US consumption of oil.
So it's a very small provider,
and there's no question
that Texas and
Louisiana can continue
to supply the military's needs
without any government support
whatsoever.
So that part of it is
already taken care of.
What this is mostly about
is an economic question
of distribution, right,
of redistribution
of winners and losers.
So the consumers of oil, which
is you and I, anybody who's
filling up their gasoline
tank on a regular basis,
benefit from lower oil prices
where as the producers benefit
from higher ones.
And that's the struggle,
and they sort of
want us to believe that
we should have higher oil
prices for that benefit.
The US has never had a
nationalized oil industry.
The closest it got to
that was in World War II,
and even in the face of
this extraordinary war,
the oil industry would
not go along with that,
and I don't see it.
I know there is a lot more
discussion about that topic
now, but I'm
skeptical that we're
going to get to that
point in this country.
In other countries, in
Europe particularly, it's
much more plausible because
the idea of nationalization
has always found more fertile
ground in those politics.
MARK BLYTH: But is there also
an exporter importer dimension
here in that exporters do not
want control by governments.
They like free
markets, et cetera.
And then the importer's
would actually
like to have control over
supply because it's insecure?
Is there something in there?
JEFF COLGAN: That's interesting.
I mean, there is,
but there's also--
if you look at Saudi Arabia
and Iran and Nigeria,
they all have national
oil companies,
and so there's nationalization
actually on both sides.
And the US is particularly
wedded to a capitalist model
for better and for worse.
And so I think nationalization
is less likely in this country.
MARK BLYTH: Yeah.
I mean, a good example
of that [INAUDIBLE]
is the comparison
between airlines.
So basically, the
British chancellor
has said explore every
other possibility.
Literally go find the change
down the back of the sofa
before you come to me
because if you come to me,
I'm taking ownership stakes.
And when that was floated,
Boeing's chief executive
came up and said, oh, no, no.
No, no.
No way.
No, we'll take the money, but
you don't get ownership, right?
So yes, there's very much a
different politics on this.
Before we go into Q&A then,
let's just talk finally about--
do a couple of scenarios and
then the winners and losers.
Let's suppose that there's
an effective vaccine
within 12 months.
There is no recurrent
virus waves.
We do begin to bounce out
of this quite quickly.
What happens to the
oil price, and what
happens to, if you will,
the politics of oil
in that scenario?
JEFF COLGAN: Well,
you can imagine.
I mean, right now, the price
of oil is about $20 a barrel.
You could imagine us
returning to $40 a barrel
under that sort of
relatively rosy scenario
relatively rapidly.
Maybe even higher.
If it gets up higher
than that, of course,
you attract new production,
and all of those production
cuts that we've been adopting in
the last month, they melt away,
and so that
stabilizes the price.
So I don't see it going
much higher than that.
And that's still, let's keep in
mind, much lower than January
1st of this year.
It was $70 a barrel.
So either way, this has been a
big change for the US industry.
MARK BLYTH: Can I ask a question
that's somewhat off topic--
well, it's on
topic, but it's not
where I was going to go
next, but I thought of it.
Whatever happened to peak oil?
JEFF COLGAN: Right.
So peak oil demand
versus peak oil supply
are so different, right?
So this idea that we were
going to run out of oil,
it's sort of disappeared in
a couple of different ways,
but shale industry and
the fracking revolution,
I think, in some sense
crushed that idea
that we would get to
a point where we just
didn't have enough oil in
the geology of our Earth.
Instead the thinking
now, I think,
is much more about
peak oil demand
and when the global
energy system moves away
from fossil fuels
in part, of course,
linked to climate change.
MARK BLYTH: So then let's
do a second scenario,
and then, we'll go to questions.
A much less benign one--
rather than the bouncing V
or the extended U, that
we permanently shift down
to a lower set of growth
trajectories across the world,
that consumer's expectations,
[INAUDIBLE] expectations are
revised down, that not third
of GDP, we really do lose it,
and we move into a
different track--
what happens to the oil
industry then in the centrality
of oil to world politics?
JEFF COLGAN: Yeah.
It's going to
change dramatically.
Of course, we have
to work this out,
but I think it's much more a
country by country scenario,
right.
So there are going
to be some countries,
as I said, Canada among them,
that are high cost production
countries that will
just get wiped out
and exit the business more or
less completely whereas Saudi
Arabia is going
to be pumping oil
until the end of this
century, I would expect,
and quite a bit longer
than that in the sense
that their oil can be produced
at around $10 a barrel
profitably.
And so when they're able to
do that so cheaply that it's
hard to imagine that they're
going to be kind of driven out
of business under any
economic scenario.
The US is caught in the
middle, and that's really
why it's so
complicated here, and I
think most cost estimates
are around $35 to $40
a barrel for oil producers.
But what we saw in 2014
when the price of oil
fell dramatically then,
too, was that at that time,
the estimates of cost
profitability was around $65
a barrel, and the frackers
and the shale industry
grew quite a bit more efficient
and lean and productive.
And so one never knows what
the next set of innovations
might allow.
MARK BLYTH: Yeah.
So that's great.
We're at the halfway point
so let's turn to questions.
There's a whole bunch
of them come here.
If we don't get
to your question,
I do apologize because
we do have too many
so I'm going to have to
pick and choose here.
Following on from the themes
that we've been talking about
are three of them
grouped together here.
So let's go with the first one.
So this is from Tom Slate.
Can shale oil even continue
in a world of low price crude?
If we get stuck basically at
the lower end of the scale,
does that just kill the shale
oil industry permanently?
JEFF COLGAN: Yeah.
So in the short term, shale
will persist, I think,
and of course, it will be the
leaner and low cost versions
of shale that will persist.
In the longer run, I don't know
is the true answer that I think
the conventional oil is in the
places with the right geology,
it's always kind of at the
bottom end of the cost curve,
and it's the most
profitable oil.
It's possible that
shale in the US
would just get wiped
out because of that,
but that's a
multi-year scenario,
and there's so many unknowns
in the next two years
that that would not be
the one that would be
at the top of the deck for me.
MARK BLYTH: But thinking of
the politics of this then,
given that it's a huge number
of small producers, that
makes it a bit more
difficult to bail out.
If you've got one or
two big companies,
and you could just
funnel money to them,
then classic American bailout.
If it's lots of
small producers as we
see with what happened
with the Small Business
Association and the
Paycheck Protection Program,
that spells trouble
in the sense that it's
very hard to bail out
fractionalized industries
like that.
JEFF COLGAN: Yeah.
What we might see
is the oil industry
becoming a lot more like the
tech industry in the sense
that small companies
grow for the express
purpose of being bought out
by one of the giants, right.
MARK BLYTH: By Google, right.
Yeah.
JEFF COLGAN: By Google, right.
And so in the next
little while, we're
going to see a lot of
mergers and acquisitions,
I expect, in the oil industry
because of the hard times.
But regardless, we might see
the kind of industry structure
where Exxon and Chevron
become the market makers that
choose OK, what do we expect
are the best bets out there
of these small fry,
and we buy them up,
and let the other ones die.
MARK BLYTH: Yeah.
Wow.
So basically a kind of like
private equity scenario
or writ large for
the oil industry
with lots of consolidation.
Following on from this,
let's talk about the politics
beneath all of this.
Timmons Roberts who you know,
one of our colleagues at Brown,
is very interested in the
climate change denial industry,
and he asks, if we go to
$10, to $20, to $30 a barrel,
the companies' profits
along with their share price
gets totally hammered.
What happens to the
ability of these companies
to fund those types of climate
change denial networks?
Does that put a cramp in
those political ambitions?
What do you think?
JEFF COLGAN: I do think
that it shrinks resources,
and so from that sense, it
could be a net positive story
if you're concerned
about climate change.
But I also think that
there's a certain segment
of the kinds of
regulations or the efforts,
the lobbying efforts
for bailouts,
that are so important
for this industry
that those are not
surplus expenditures.
Those are essential
expenditures.
And so if we think that the
current expenditures are
around $200 million a year by
the oil industries resisting
environmental legislation,
maybe that shrinks,
but it doesn't go
away completely.
MARK BLYTH: But if
they want a bailout
or if we renationalize
them, couldn't we just
say now you don't get
to do this anymore?
JEFF COLGAN: Yeah.
If we renationalize, absolutely.
MARK BLYTH: Yeah.
Marc Saltzman asked this one.
On the renationalization
of energy production,
is there a potential
climate gain to this?
How would the
politics of this shift
if oil reserves were
owned by the state
rather than by
private interests?
JEFF COLGAN: Yeah.
There's a huge
upside on the climate
side for nationalization,
I think, to the extent
that the government is
helping out oil companies.
It can and should
expect equity stakes,
and there should be
rules attached to it.
It shouldn't be a blank check
on public money to a big oil
industry that has
benefited massively
from the upside of
capitalism and is
resisting the downside
risks of capitalism.
So there is a role to play
here and a way forward
on the climate side,
but the question
is, the hard question
is, whether the politics
of a Republican
controlled Senate
would allow for those
kinds of requests and rules
on oil companies.
Would they be put in place
by a Republican led Senate?
MARK BLYTH: [INAUDIBLE].
But another of our
colleagues, Patsy Lewis,
has asked this one.
What are the likely implications
for Guyana which has just
started oil production?
JEFF COLGAN: Yeah.
So Exxon has said
that it will continue
to go ahead with the
Guyana project in the sense
that it was a long
term exploration--
not exploration-- a
production project.
Anyway, I mean,
this is something
that they expected to
unfold over decades.
So I don't expect it
will suddenly evaporate,
but there is this
question of, well,
what happens if
Exxon itself runs
into trouble because of all of
the difficulties in its home
market.
And those questions
are anybody's guess.
MARK BLYTH: Right.
Leslie William Robertson
asked the following question--
how do you see the collapse
in the oil price affecting
current geopolitical
conflicts and pressure points?
The low price and
challenge of storing oil
suggests a diminished
motivation for conflict
to capture the resource, yet
major wars drive demand for oil
and might support the price.
So in a sense, if
it falls to low,
does that create an
incentive for conflict?
Now, this is something
that you've written
about more than anybody else.
So let's go for the Jeff
Colgan opus on this one.
What's the relationship between
the oil price and conflict?
JEFF COLGAN: Well,
I would like to be
able to paint a mostly happy
story on this in the sense
that, for instance, Saudi Arabia
backing out of Yemen as we've
seen in the last
couple of weeks.
I think they painted it
as a humanitarian story
about oh, well, we don't
want to make things worse
with the coronavirus outbreak.
My skepticism about the Crown
Prince's humanitarian instincts
is very high.
And so I think this was
actually much better
explained as a fiscal
story that they
were trying to reduce what is
a very expensive war machine.
And so lower oil prices
in that sense, I think,
does drain the capacity, not
immediately, not tomorrow,
but over time, drain the
capacity of oil producing
states to get into wars,
to get into foreign policy
misadventures of various kinds.
That's my mostly positive story.
There is a little worry,
though, about the fact
that President Trump
does have on some level
an incentive to engage
in conflict with Iran
probably because turmoil
in the Middle East
does tend to prop up oil prices.
And so that is a very scary
side and sort of scenario.
And you'd like to think that
the White House would not
follow that logic too
far, but it's hard to say.
MARK BLYTH: And what
about Nord Stream 2?
This is a question that
came in off of YouTube.
So I'm sorry.
We don't have your
name, unfortunately,
but thanks for bringing it up.
So how does Nord Stream
2 factor into this?
The Americans have
basically put sanctions
on the Russian companies
that were doing it.
The Germans want it.
The Germans have completely
lost faith in the United States
under the current
administration and are
trying to find ways to basically
make it happen because that's
their energy security.
How does that one play out?
JEFF COLGAN: Well, I
followed Nord Stream 2
very carefully when I was
in Copenhagen last year
because they were sort of
the final turning point,
and Nord Stream 2 seems
like it's going to go ahead.
It's basically cleared
all of the major hurdles
and obstacles.
And so at this point, although
the US has worked hard
to oppose it, I think
that the US has now
lost the battle in that
respect, and Germany is going
to get Russian natural gas.
The bigger question
is whether the US
is right in the
long term to worry
about German dependence
on Russian natural gas
and whether that comes
with political ties.
Germany's leaders are betting
that it doesn't, and we
shall see.
MARK BLYTH: Mhm.
Definitely.
So here's another
one from YouTube
that brings us into
interesting tertiary territory.
What happens to tertiary
industries in all of this?
Other major subsistence
sectors of it all will survive.
What's the path for
rebounding in services?
And I would just add to
that, let's think of this
historically.
When we think of oil
crises in the past,
the one that comes to
mind is the 1970s--
large price increases,
inflationary effects,
et cetera, et cetera, right?
But this seems to
be very different.
It's quite the opposite.
I mean, there's a massive
deflationary effect,
right, rather that that, but
also, our countries' growth
models and industries
have dramatically changed.
We're no longer making stuff.
We're basically selling
each other's services
and essentially use more oil,
but much less intensively.
So walk us through
a couple of sectors.
Basically, what
happens if your--
you mentioned
fertilizers, but what
about plastics and chemicals?
Is this great because these guys
have now got lower input costs
and that helps get away from the
deflation of the current moment
because of lock down.
And then services-- I mean,
beyond driving to work--
nobody uses heating oil anymore.
In the '70s, they used
to actually pour kerosene
into heaters in factories and
burn it in the room, right.
Nobody does this anymore.
Is there a way in
which oil matters less
even though we still think
it's incredibly important?
JEFF COLGAN:
Compared to the '70s,
it certainly matters less for
heating and for electricity,
and so what's
crucial about that is
that there are other fuels that
can compete for electricity
and heating, right.
So coal and natural
gas and wind and solar,
they can all do that.
The thing about oil is that
it's king on transportation.
And so that's where
it matters most,
and it continues to be
sort of the lifeblood
of the modern economy.
That part hasn't changed.
I do think that this
lower oil prices is
going to help a lot of sectors
of the economy like Amazon
or any other delivery business,
which is, of course, benefiting
massively by all of
us being shut in.
Well, they drive trucks, and
so the cheaper fuel prices
are going to help
them a lot it is going
to help the airlines if they
ever get some customers again
to fly cheaper
because about a third
of the price of the
cost of your ticket,
right, an airline
ticket, is fuel costs.
So that's going to help.
The ones that are
really going to get
slammed are the
oilfield services.
It's not the big oil
companies that you
know of like Exxon and
Chevron, but the Halliburton's
and the Schumberger's
and the Baker Hughes,
which are huge oil firms that
employ tons and tons of people
who do actually do a lot of the
physical work of lifting oil
out of the ground.
Those ones are really
getting destroyed
in terms of their earnings
and revenues over time.
MARK BLYTH: A couple of other
questions just popped in, one
from John Irving , who's
a local around here.
I'm going to embellish
this a little, right.
Trump loves tariffs.
So what's the
prospect of a tariff
on Saudi oil at 40 bucks?
Take the difference
between market and 12%
and apply the rest as
a tax to the recovery
to the US treasury.
Can't we benefit from this?
In a sense, protect our
oil, punish the Saudis,
even though they're our
allies, and basically,
get some rents in to
basically help the bailout.
JEFF COLGAN: Yeah.
So this is definitely
one way of making
sure that the revenues
flow to American companies
or at least to an American
government that can then
redistribute it in some way
as opposed to foreigners.
But remember that every
tariff we put on foreign oil
is going to hurt
consumers as well, right.
We're driving up the
price for US consumers.
And so this is not so
much a national issue.
This is an intra-American
distributional issue, right.
It's producers versus
consumers within the country
because we are, at
this point in time,
basically balanced between
how much we produce
and how much we consume.
So there's sort of an equal
weight on both of those sides.
MARK BLYTH: Yeah.
So it's not-- sadly, tariffs
are not always the answer.
Well, who knew?
Will we see the end of the use
of the dollar for global oil
trades?
What do you think?
JEFF COLGAN: Well, that one
has been around for as long
as I've been watching
oil politics.
It continues to get
floated, but it's actually
more in Mark's area of
expertise than mine.
I think that question is deeply
connected to how long does
the US remain the
global reserve currency,
and my understanding is
probably a lot longer still.
But Mark, you should--
MARK BLYTH: I would say
a lot longer than us.
And the basic story
I tell all the time
is that everybody's
growth models are
interdependent with each other.
You can only have giant
export platform models
like the Germans to the extent
that we run chronic deficits.
Now, given that we run
these chronic deficits,
we pay for stuff in dollars.
We are never going
to make real stuff
to volatilize those
claims on those BMWs
that we're actually
bringing in, right?
So what happens is
all those dollars go
to the foreign banking system.
They can't actually
use them because you
have a different
currency, et cetera.
So you have to turn
it into an asset
to make it not a
liability on the balance
sheet of these banks
so you buy treasuries.
And then when you
buy treasuries,
that just comes back to us
to allow us to do more stuff.
And when you're basically
70% of all trades,
70% of all reserves, you're
just not going anywhere.
I mean, another
interesting angle
on this, though,
that came in was
a question that came in
quite early off of YouTube.
Are we witnessing a sort
of Dutch disease lesson
en masse, and what
will we learn from it?
Does the lesson for
commodity exporters
differ from the general lesson
of lacking redundancy, having
a diverse portfolio, companies
and assets, a diverse economy,
et cetera?
So just as oil if you are
Venezuela, if it drops,
you're dead, right?
In a way, the United States--
and actually Brendan Greeley
of the Financial Times is
writing a book on this topic--
the dollar is a
kind of a commodity
that we export to
the rest of the world
that everybody else has to use,
but we're the only producer.
And in a sense,
that makes us lazy.
We can have crazy
politics and do
whatever we want because
ultimately, there's
no alternative to the dollar.
It's kind of like an equivalent
to oil in that sense,
although there seems
to be no downside.
It doesn't seem to drop
the downside in the way
that oil does.
So no answers, but definitely
a set of interesting questions.
JEFF COLGAN: I mean, let me
say on the Dutch disease.
One of the components of
the sort of resource curse
generally is huge volatility
of the revenue flows,
and that, we are
absolutely seeing
en mass in that the
US is experiencing it,
lots of other countries
are experiencing
it, and in both directions
where the consumer
countries and net importers
love to see lower oil prices,
but it hits very hard
on the exporters.
And one thing, if we're
talking about kind
of interesting, unusual
geopolitical alignments,
China gets a lot of
its oil from Angola,
and Angola's oil
is very expensive,
and they are going to
run into deep trouble.
And so what we might see
is China consuming a lot
more Saudi oil
instead of Angola oil,
and that creates an interesting
dynamic where the US and Saudi
Arabia have always had
a close relationship.
Will the relationship
with China now become
stronger for Saudi Arabia?
MARK BLYTH: Interesting.
Just on the same point before
we move on to volatility,
question just came
in, why is China not
taking this chance to
dump dollars and kill
the hegemony of the dollar?
Because that's their
national savings,
and if they dumped
them all, they
destroy their national savings.
So you can do it, but it's a
bit like Italy leaving the euro.
You would basically destroy
half of national savings
in the process so you'd be
worse off than sticking with it.
Basically, it's
kind of like putty.
You're stuck with it.
JEFF COLGAN: There's
a remarkable story.
You know this better than I do,
Mark, but that remarkable story
of how in their financial
crisis, apparently
Russia went to the Chinese
and said, let's work together
to dump the US treasuries and
really hurt the Americans.
And that seemed like a great
idea from Russia's perspective,
but China said, no
way, we're holding
most of those treasuries.
We don't want to
lose all that value.
MARK BLYTH: Absolutely.
Absolutely.
Back up to volatility--
so Marco Vinte,
and then, some one else
came in in a similar topic,
so I'm going to bring these
two things together here.
Marco says the shale question
touches on the consideration
that renewable energies
cost of capital
has steadily fallen
over the years.
Naturally, volatility
should also be considered.
Does this event prove
that oil and gas may not
be priced properly
in markets given
the volatility that can arise?
Let me link to something else.
Solar is killing fossil fuels
in solid liquid gas order.
When's the tipping
point for more money
going through renewables
instead of gas?
So we've said that because
the price has fallen,
you get the short term, if you
will, delayed action on it,
but let's consider the
volatility as a problem, right.
You don't get that
vol with renewables.
So if you want to
invest going forward,
surely you want something
that's got low vol.
This proves that
oil and gas really
is mispriced pretty much a
lot of the time because if we
remember 2006-- what did
it peak at? $146 a barrel?
JEFF COLGAN: Yeah.
MARK BLYTH: Yeah.
Right.
And now it's negative, right.
So that's the definition
of volatility.
So let's play with
this volatility issue.
I mean, if you're going
forward, and you're
trying to secure
your energy supply,
and you want to have regular
electricity, et cetera,
you want something
that's low vol.
You don't want this stuff.
JEFF COLGAN: Yeah.
So it's always been a boom bust
industry going back a century.
It's very difficult
to get away with that
unless you have a worldwide oil
cartel, which has only really
ever been achieved once,
which was under the Seven
Sisters, these oil
companies, Anglo American oil
companies in the '50s and
'60s, that could do it.
But since then, we've had
very high oil volatility,
and that does, I
think, make renewables
more attractive because they
can have steadier prices.
But think about right now how
natural gas is very often--
the price of natural gas is
linked to the price of oil.
So natural gas prices
are also very low,
and if you're a natural
gas power plant,
you're sitting very
pretty right now.
You are out competing
my guess on economics.
You are out competing
the renewables
when natural gas is this low.
It's like between $1 and $2
per whatever, 1,000 cubic feet.
MARK BLYTH: Wow.
Why is it linked?
Because they're
distinct things, right?
JEFF COLGAN: They
are distinct things,
but they are often
linked in part
to control the
alternatives, I think,
and also because
gas consumers want
to contract around something
that gas producers can't game.
And so the idea is that world
oil prices are exogenous.
Nobody can mess
with those too much.
And so that's why gas prices are
linked to them in [INAUDIBLE]..
MARK BLYTH: Right.
Question that came in from
[? Benish ?] [? Pervis. ?] What
are the economic consequences
for the US when they choose not
to extend liquidity swap
lines to China and Russia?
Short answer, nothing because
ultimately, they still
need dollars.
That's pretty much it.
It goes back to that idea
of the dollar as commodity
so we don't really
have to worry about
because we are the only
producer in that sense.
Anything else that you
want to talk about, Jeff?
What haven't we covered?
We're getting into
the last 10 minutes.
JEFF COLGAN: Well,
just on that point
that [? Benish ?]
asked about the--
because there was this
interesting arrangement
between 14 central banks
that the Federal Reserve was
at the center of and
helping them out, and then
China and Russia were
not part of that.
And so there was
this question, I
think, temporarily about
whether China and Russia
were on their own in terms of
managing the pandemic crisis.
And then, Mark, you know
this better than I do,
but as I understand
it, the Fed basically
said any central bank that has
assets in the New York Federal
Reserve can borrow against them.
And so they basically helped
stabilize Russia and China
as well in the sense that
they could use those assets.
MARK BLYTH: Yeah.
So the ECB can
take dollar assets
and then give them to China.
So basically, it's a kind of
don't ask, don't tell, right?
That's really what's going on.
Like so much of what
the Fed is doing
because they-- when
you're buying ETFs
and at the same time using
BlackRock as the people
to help you understand
what's going on-- whoo,
there's a few conflict
of interest questions
there in my opinion, but
that's a different story.
Like I said, anything else
that you want to talk about?
JEFF COLGAN: Nothing
that leaps to mind.
MARK BLYTH: We've got a
new one coming, a new one.
De de de de de de de.
Not really seeing the question.
I wish I could see the
question in that one,
but I don't really see it.
I don't know.
Have we explored it?
Have we exhausted it?
Have we flogged the
proverbial dead horse?
JEFF COLGAN: Well, I
would say that the--
I mean, the dynamics
around OPEC are probably
the continuing story here.
That there is a question
about how much they're
going to be able
to cut, and they
made this almost 10
million barrels a day
cut over Easter weekend.
As I said, there were other
cuts that were sort of promised
by the US and other
non-OPEC producers,
but those were all market driven
cuts so they're not real cuts.
But OPEC, actually,
was making a commitment
to cut starting May 1st, right?
So even though they
made that promise,
those cuts haven't
come into force yet,
and so one question here
is how does the oil price
react once those cuts
are actually in play?
MARK BLYTH: Here's
two questions.
One of them came in,
and the other one I just
thought of that we
can use in closing.
Is OPEC of any of
relevance at all anymore?
JEFF COLGAN: So I have
been arguing for years
that economically,
it is not relevant.
It is not relevant because they
can't actually get agreements
that they stick to.
They say, OK, we make
an agreement in Vienna,
and there's a big splash
in the newspaper headlines,
and it actually does move the
prices a little bit in the week
afterwards.
But then, if you look at--
you actually follow the
story, and of course, it
disappears from the
media, but the compliance
on those agreements is abysmal.
And it's very unclear
that OPEC is actually
changing any of its
members behavior, right,
in terms of what they
would have done otherwise.
So when they make announcements
like that, they're
very often saying, here's what
we were going to do anyway,
and OPEC isn't actually
driving the bus so to speak.
It's really Saudi Arabia that
is signaling to the market,
here's what we expect
the future to hold.
MARK BLYTH: And then
a very simple one,
but a very interesting one.
Does a change of
President in November,
assuming such a change
happens, assuming
such an election happens--
let's assume that happens.
There's a change of President.
Does that have any
bearing on this at all?
JEFF COLGAN: Well, I
think it does matter
in terms of the form of the
bailout for the oil sector.
I think it could change a lot in
terms of to what extent we are
helping oil companies versus
either helping the workers
or doing some sort of
public equity stake
from the US government
getting-- so that, I think,
matters a lot, and
of course, it's
not just the president
that matters.
It's Congress that's going
to matter, but to the extent
that there could be a
shift in political winds.
That could be very consequential
for the US oil sector.
MARK BLYTH: OK.
Just one final question
then, and we'll close it out
on this one seeing as
it's a [? night. ?]
It was actually the first
one to come in, too,
so I've been saving it up.
It's Chris Garrity asked
the following question--
I'm going to ask you
particularly, Jeff--
what major assumption, if
any, underlying your views
of international
energy and economics
have changed over the
past five, six weeks?
What's happened
that's made you go,
oh, I really need to
kind of fundamentally
rethink something?
JEFF COLGAN: That
is a great one.
I'm not sure this qualifies as
a fundamental principle of IR,
but when I first read
about the possibility
of negative prices--
about six weeks
ago, oil analysts
started talking about it--
I thought, oh, come on.
It couldn't get
that bad, and then
as I sort of started to dig into
it and think about, well, maybe
what would the conditions be
that could make that happen,
it did start to seem
like a real possibility.
And actually, 10 days before
oil prices went negative,
I was on Al Jazeera saying,
oil prices are going down,
which is a thing I
normally do not do.
I do not predict oil prices.
There's too much randomness
in it, but in this part,
the fundamentals
were just so glaring
that I felt comfortable
making that call.
MARK BLYTH: I guess a call
which you can probably
continue to make at least
for the foreseeable future.
JEFF COLGAN: If only I had some
way of making money off of it.
That's--
MARK BLYTH: Exactly.
Well, I mean, you've
got this whole contango
in the market whereby the
forward price is higher than
the futures price, et cetera.
So I'm sure there are some
clever financial engineers
somewhere making
money off of it.
JEFF COLGAN: Oh, yes.
MARK BLYTH: But like you, I
have no idea how to do that,
and it's too complex, and it's
much easier just to not bother.
All right.
Well, thank you very much, Jeff.
This has been incredibly
enlightening and undoubtedly
entertaining at the same time,
which is what we strive for.
So [INAUDIBLE] next.
I think you should know and
view someone else at Watson.
JEFF COLGAN: Sounds like a--
MARK BLYTH: So that
will be the next one,
and we'll go from there.
JEFF COLGAN: You're a
very good interviewer.
Thanks so much, Mark.
MARK BLYTH: OK.
Thank you very much.
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