'Windfall: How the New Energy Abundance Upends Global Politics and Strengthens America's Power'

Meghan L. O'Sullivan discusses her new book, Windfall: How the New Energy Abundance Upends Global Politics and Strengthens America's Power.

Energy has been - and will continue to be - a major driver of foreign policy and national security. In her book, O'Sullivan explains how the ongoing energy revolution - in oil and gas, but also renewables - is shaping foreign affairs much more than other policy issues that receive more attention.

 

YERGIN: Afternoon, everybody. Welcome to the Council on Foreign Relations D.C. Fellows’ Book Launch. The book we’re talking about today is called “Windfall: How the New Energy Abundance Upends Global Politics and Strengthens America’s Power.” We have the author here, of course, Meghan O’Sullivan. Meghan is now a professor at the Harvard Kennedy School and runs the global energy security project there. She was a special assistant to President George W. Bush and deputy national security assistant for Iraq and Afghanistan, and spent some time as an advisor in Iraq, and has been working on this book for several years. Times change while you’ve been working on them.

Meghan, maybe we’ll start by just talking about how you decided and why you decided to write the book. Did it come out of your experience in Iraq, or what teed it off?

O’SULLIVAN: Sure. And let me just begin by saying good afternoon and thanks so much for spending your lunch hour with us, and a special thanks to Dan for doing this. Dan has been a source of advice, support, and inspiration as I’ve really moved into the world and looking at this intersection between energy and politics. So thank you very much for that.

YERGIN: Thank you.

O’SULLIVAN: My impetus for writing the book, I don’t—I wouldn’t draw it back directly to Iraq. But it’s almost on reflecting after my time in Iraq as to how much the world needs to be understood, both by wearing a foreign policy lens and a lens that understands energy markets. So I can point back to specific moments during the time that I was working in government, whereas mostly looking at the picture from a foreign policy perspective. So a great example that I like to give is just times when I traveled with Secretary Rice to meet Saudi officials to try to convince them to be more supportive of Baghdad. And I tended to look at that—

YERGIN: Did it work?

O’SULLIVAN: (Laughs.) It actually seems to be working now, but I can’t take any credit for that. But it was interesting, we saw a lot of the Saudi resistance to the regime in Baghdad—or, the government in Baghdad as being motivated by sectarian differences. And clearly that was some of it. But there was also an energy dimension which I don’t think—I didn’t fully appreciate that at the time. So 2007, high oil prices, the Saudis being the only holders of spare capacity. They didn’t have any rivals in that department, but the Iraqis were talking about becoming challengers to the Saudis. They were talking about pumping, you know, 12 million barrels a day, eventually, and holding spare capacity. So, you know, from that, I learned you really need to look at events with a foreign policy lens and an understanding of energy markets and technology.

YERGIN: But, so Meghan, by that point—at that point, there was no energy windfall. It was a very different.

O’SULLIVAN: No, it was a different world.

YERGIN: We were going to run out of oil. That was not peak demand that was peak supply.

O’SULLIVAN: Peak supply.

YERGIN: So what do you mean by the windfall? I should do—you all, this is her book. So, just—

O’SULLIVAN: There we go. (Laughter.)

YERGIN: Done my job.

O’SULLIVAN: Excellent. Thank you. I mean the windfall—so I wanted to call the book originally serendipity. And that—

YERGIN: That’s hard to spell.

O’SULLIVAN: No. (Laughter.) Apparently not a lot of people at Simon & Schuster liked that name. But the whole idea is that this is a bit of an unexpected gain or boon for the United States. And it begins from the premise that over the last 10 years, as Dan just mentioned, we have moved from a world that was informed by this fear of energy scarcity to a reality of energy abundance. And contrary to many expectations, this energy abundance has, not exclusively, but been largely fueled by increases in production in oil and natural gas. And so the windfall element is that it’s somewhat of a surprise and it’s a huge strategic boon. And the challenge that I talk about in the book is understanding how this has reshaped global affairs. And, as Americans, how we can take advantage of this moment to really maximize it.

YERGIN: So you say—one of the things that jumped out in the book—you say it’s a powerful antidote to the notion of systemic American decline. What does that mean?

O’SULLIVAN: Well, I think it gets at the reality that a lot of Americans have begun to understand this linkage between energy and foreign policy. But there’s still a lot of misunderstanding as to what the benefits are. So people are expecting energy independence. They’re expecting liberation from Middle Eastern politics. And my book tries to argue that there are benefits, they’re just more subtle. And they require a better understanding of energy markets.

And here, I would say, the antidote to American decline is a manifestation of how this energy boom has been a source of soft power for the United States. Ten years ago, again in a context of energy scarcity, it was very frequent. You’d hear the Chinese, Russians, others talk about American decline. Ten years later, there’s more of a debate in these countries, particularly in China.

YERGIN: Do they think America’s great now?

O’SULLIVAN: (Laughs.) I don’t know that they think America’s great. We haven’t yet convinced them of that. But they certainly say—you know, there’s a question mark. And there’s a lot of reasons for this. But one of them is this energy boom, because it has underscored the power of American innovation and ingenuity.

YERGIN: So, I mean, you’ve traveled to an awful lot of countries to do this, talked to an awful lot of people around the world. Are you kind of implying that actually people within the United States have less of a recognition of the significance of this, as you call it, windfall than other countries?

O’SULLIVAN: Than other countries? Well, let me take the part about how Americans understand or perceive this. I do think that Americans are now aware of the fact, or becoming aware of the fact, that energy is now an asset for the United States rather than a vulnerability. So looking around the room, there are many of us who have worked in government. And we kind of got used to working under the assumption that our energy position was just one of those enduring vulnerabilities. And that has changed pretty dramatically in the last year. I still think there’s a misunderstanding of what the strategic benefits are. I think people understand a little bit more about this is good for—you know, this can be good for jobs, this can be good for the economy. And I acknowledge that in the book. But I also really try to underscore how this has changed the global strategic environment in a way that’s good for the United States.

YERGIN: I remember Ben Bernanke, before the price collapse in 2014 after he left the Fed, said that this whole shale boom was one of the most positive things, then he said the most positive thing to have happened to the U.S. economy since the financial collapse. And you touched on it. There are millions of jobs that flow from this.

O’SULLIVAN: There have been millions of jobs that have flowed from this. Of course, they have ebbed and flowed in number a little bit based on the price. We’ve seen when the price went down that some of the places that were booming contracted a bit. But overall, I use some numbers in the book that says, you know, the benefits to the economy were even greater than the supplemental that was passed to try to address the financial crisis, just in terms of sheer numbers.

YERGIN: So one of the prominent Democratic candidates in 2016, not the one who got the nomination, wanted to stop all—

O’SULLIVAN: It’s a guessing game you have us on.

YERGIN: Oh, yes. Wanted to stop all fracking, which, of course, would also stop fracking in conventional oil and gas too. I mean, there is an assumption here that this windfall continues. I mean, have you—did you think in the book about kind of whether there would be an effort to kind of bring it to a halt?

O’SULLIVAN: Sure. In fact, like many books—and I know you’re sympathetic to this—this book went through many iterations. You know, the first iteration was before the price collapse. And most of the book focused on how we should anticipate a price collapse, which is controversial and interesting until it happened. (Laughs.)

YERGIN: You just didn’t get it out in time. It could have been prophetic.

O’SULLIVAN: Exactly. So at one point, you know, I was writing it with more in mind, the idea that the challenge to sustaining this boom was in the political realm, and that there could be a political push that would lead to a severe restriction of fracking. And, you know, my argument was trying to make people think about the cost-benefit analysis in a way that incorporated strategic gains as well as economic ones. So I think it would be—it would be a very significant reversal of American fortunes if we were to ban fracking. But that’s not to say there isn’t a role for regulation, because there certainly is, because there are legitimate concerns about environmental effects.

YERGIN: Well, and, of course, it is a highly regulated activity to begin with. But one of the things that I was struck with in your discussion, which maybe is a little counterintuitive, you actually sort of advocated more state regulation—the balance between federal and state that actually things shouldn’t swing too much to the federal but rather should stay with the states. And I think it’s a little wonky, but you might explain that.

O’SULLIVAN: (Laughs.) If I can’t be wonky with this crowd, you know, who can I be wonky with, right? (Laughter.) So—

YERGIN: Wonk away.

O’SULLIVAN: (Laughs.) No, I think—you know, again, one of the big questions is not should there be fracking or no fracking. It’s what’s the right level of regulation. I think there will continue to be a debate about this. But one of the sub-debates is, like, and who should be the right—who are the right regulators? I think there are certain issues that maybe make more sense to regulate on a federal level, if they have cross-state border implications. Maybe methane emissions is one of them. But there are other issues, I think, that make more sense to be regulated at the state level, as long as there’s capacity to do that. And because a lot of the effects—you know, we’re not looking at the potential of a Chernobyl or something. We’re looking at a lot of local risks, local effects. And local communities may be best positioned, or state-level officials best positioned to regulate and to figure out, you know, what the right level of risk is for that state or community.

YERGIN: Right. Well, let’s now turn to the sort of broader geopolitics. You know, if you had upheavals, wars in the Mideast, Venezuela teetering on collapse, et cetera, et cetera, all these conflict with Russia, geopolitics, it’s not affecting the price.

O’SULLIVAN: Well, it’s interesting. In the context of writing this book—so begin, again, before the price collapse. I actually had an acquaintance of mine saying he was leaving the energy trading business because it had gotten so uninteresting because geopolitics had become divorced from energy markets. And this was after the Arab Spring, where you had the most volatile politics in that region in decades, but the price was not really affected by it. So there was this sense that these two things had decoupled. I don’t think they’ve decoupled. I mean, the issue right now is the world has a lot more excess supply. And so it is able to absorb shocks better than it would have otherwise.

So that doesn’t mean that geopolitics won’t still be a good issue and that it couldn’t affect price—in fact, I would anticipate—you know, if we look at—we look at Libya and we look at Venezuela together, that these are two geopolitically uncertain moments that could well end up in a—you know, a significant restriction of global supply that could affect price. So, I wouldn’t—you know, I don’t expect that you would write off geopolitics and I’m certainly not going to write off geopolitics.

YERGIN: Right. Well, to get more specific on geopolitics, how has this windfall in your view—and you’ve spent a lot of time in the region—changed U.S. relations and interests with the Mideast?

O’SULLIVAN: Yeah. Here’s where my answer tends to disappoint a lot of people, because of course there’s a desire on the part of many Americans—and myself included, Elliot, I’m sure, included, many of us who have worked on the Middle East—that we’d like to have more distance from the problems of the Middle East. And the sense that if we’re not importing a lot of Middle Eastern oil that will give us the opportunity to somewhat disengage. And here, going back, again, to my first answer to your question, if we look at the world not only wearing a foreign policy lens but also wearing an energy market lens, it’s much harder to make that argument because we’re not energy independent and we probably won’t be in most scenarios. And therefore, we’re tied to the global market. And so is Saudi Arabia, Iran, Iraq—all of these countries. And so if something happens in the Middle East, that’s going to affect global supply, global prices. And that, of course, will affect Americans because the price we pay at the pump is determined, you know, internationally.

That said, I don’t think it means nothing changes in the relationship. And I think—and, again, this is a crowd that can really understand this—if you’re preparing a president or a senior official to go into a meeting with his or her counterpart, there’s only a certain number of things that you can talk about. You know, it’s not a dozen. It’s more like two or three. And for Saudi Arabia and many countries of the Middle East oil was always up there high on the list. And now it doesn’t need to be high on the list. So there’s room and scope to talk about other things. And so the nature of the relationship or the tenor of the relationship I think has changed. So it’s not dramatic, but it’s not insignificant.

YERGIN: Do you see in your conversations there, how do you find some of the key decisionmakers, how do they see this windfall? And does that change their view of the U.S. and our commitment to the region. Did you run into that?

O’SULLIVAN: Yeah. No, it’s a great question. And of course, in many parts of the world—but I’d say certainly in the Middle East—perception is reality. And so there has been a sense that America, up until very recently with President Trump’s visit to Saudi Arabia, that America has been disengaging from that part of the world. And many senior people in the region would say, and this must be because you don’t need our oil anymore. And, you know, I would say, well, it does seem we’re disengaging. Not because of oil, but for other reasons. And that, I think, is immaterial. So I think there really is the perception that we are less interested in the region, even if a real cold analysis of the facts would suggest we still have a lot of intertwined interests. So I think it is informing those relationships. And it’s informing the way that, say, a country like China looks at our involvement in the Middle East. And, you know, it makes the Chinese a little nervous that maybe we’re going to be less invested in that part of the world, which they are becoming more dependent upon.

YERGIN: So what do you say to the decision makers who express these concerns to you?

O’SULLIVAN: Well, I mean, I generally will wonk out, as you would say. I would generally say, you know, actually, we still have a lot of energy interests in common. But we also have a whole raft of non-energy interests, which, you know, you and others are very familiar with. And I think the reality, the bottom line is, that we are going to continue to be interested and invested in the Middle East for a long time to come.

YERGIN: Right. Another thing that’s somewhat counterintuitive in the book. You say how the shale revolution actually could possible make the Mideast more important as a source of oil. And I think that people find that quite interesting.

O’SULLIVAN: Sure. And, again, this is the value of looking at foreign policy and energy markets together. So I think the assumption is if we—there are many scenarios that could play out. And I see Mark Finley and others here who could talk to us about the different projections about how energy markets could look in the future. And say you were in a world where there is a low price for a very long period of time. I think most people would say, well, that’s going to be bad for the Middle East. Well, it could be bad in some ways, but the reality is in that environment a lot of higher cost producers outside of the Gulf could no longer decide to produce. It’s not commercial for them to produce. And it would mean that more of the—more of the oil that the world is consuming would actually come from the Middle East. So you actually could find us in a situation—a long-term, low-price situation where the Middle East has more influence than it does right now on global politics.

YERGIN: Well, to focus on one country in the Middle East, in your view would the sanctions in Iran that got them to the table in negotiating the nuclear—the nuclear deal, could that—those—and this blends your previous book on sanctions—would those sanctions have worked without shale oil?

O’SULLIVAN: I think this is a really interesting story here. And I do think that the situation in the United States and the increase in oil production because of fracking and the tight oil boom really helped create an environment which made it easier to secure those sanctions. So, you know, if we look at the history of sanctions on oil producing countries, it’s not a coincidence that most of the time those sanctions are put in place in a low-price environment where people feel like, well, if Libya’s oil comes offline it’s no big deal because the price is low. But these sanctions, the Obama administration was able to get support for in a high-price environment. And they did that by going around the world and talking to various government officials. And they were able to make the case.

One, the Saudis have said they’ll step in if the Iranian oil comes off the market. And, two, look at the American energy sector. Every year, I think, for the last several years at the time that they were promoting these sanctions, America has produced another million barrels of oil a day, adding to the global market. And so that really, I think, eased some of the fears that would normally be in place when you’re trying to talk about taking—potentially taking significant quantities of oil off the global market at a time when the market seemed to be tight, the prices were high, and the global economic recovery was very fragile. If you talk to Tom Donilon, who has said on this on the record on other occasions, you know, when he was talking about sanctions a lot of his economic counterparts in the White House were saying: Whoa. You know, keep in mind we’ve got a fragile economic situation.

YERGIN: Right. So you mentioned sanctions on oil-producing countries. Most recently the newest sanctions on an oil producing country are on Russia. How do you evaluate those sanctions? And there was controversy—they were unusual in some ways in which the balance shifted to the legislature rather than the executive.

O’SULLIVAN: Sure. These were controversial sanctions, and for the reason that many in this room will remember. They were a big departure from most sanctions legislation in that they took the prerogative virtually away from the executive branch for lifting the sanctions and gave it back to Congress. And this, I think, has—this, you know, undermines the effectiveness—

YERGIN: Can you explain about how they took it back. What—in terms of the authorities, just so—yeah.

O’SULLIVAN: OK. So basically, usually there’s something called a waiver, in almost all pieces of sanctions legislation. And in fact, 10 years ago there were movements in Congress to pass legislation to make it mandatory to include this waiver. And that basically—the executive branch, either the president or the secretary of state, has had wide leeway to simply say at this particular moment I’m going to waive these sanctions because they’re not in the national security interest. And that has been very broadly defined. You know, President Clinton has used waivers when he was saying this is going to upset our relationships with the Europeans. President Bush used waivers. This has been a very broad authority.

This piece of legislation basically says before a waiver could be used, the Congress has the right to act on it, or has the requirement to act on whether or not the sanction can be lifted. And my problem with this is one of kind of a generic problem with sanctions, that we think about sanctions as, you know, maybe trying to maximize the economic impact that it has on a country. But there’s also another use for sanctions. And that is to try to create an environment in which a negotiation can happen. And in that environment, you want the negotiator, whoever the person is that is in charge of that relationship, to have the ability to say: If you do X, I can do Y for you. And this has been effective in other circumstances. It was important in the Iran deal. You know, going back in time, it was important in the normalization of relations between the U.S. and Vietnam. And essentially this piece of legislation takes that away. And it means that it will be harder to actually engage in Russia at any point in the future for some kind of—something that’s short of a capitulation kind of deal.

YERGIN: I mean, you could say the sanctions certainly worked on Iran. Are they working on Russia?

O’SULLIVAN: Well, I think it depends what you mean by working. If you mean has it changed Russian behavior, I don’t see really evidence of that. And so in that regard I would say they haven’t had the desired effect. But if you say the objective is punitive in some way, there’s been some punitive effect of these sanctions. And I think it’s not just now, although there has been an effect on the ability of companies to get financing and that type of thing, but also an effect on Russian energy production in the future, because as you well know, a lot of these sanctions have to do with technologies that Russia need to develop a lot of its unconventional energy, which isn’t part of their supply now but might be part of their supply in the future.

YERGIN: Right. You use the term, obviously, “windfall.” You refer to it as a strategic boon. Other people, not so far from here, talked—have a different way of describing the change in the U.S. energy position. They call it energy dominance. What’s your reaction to the concept of energy dominance?

O’SULLIVAN: I should learn from you. You never mention anyone in particular, it’s just a general reference. No, I think energy dominance—you know, it’s not—

YERGIN: It is the administration. (Laughter.)

O’SULLIVAN: I think that’s clear. Energy dominance, you know, I think in some ways—I think the Trump administration, as I mentioned, is right to acknowledge this is an asset and to think about energy as a strategic tool. But I think that there are some problems with the way that this concept has been developed. I don’t even like the sounds of it, because it sounds aggressive and it sounds like a zero-sum game. But my real issues, I would say, are kind of twofold. The first is quite simple, that the focus has been, I think, largely on fossil fuels and increasing production of fossil fuels. And in my mind, you know, that’s appropriate under the right conditions. But in today’s world, there’s just no denying it, that energy superiority or energy prowess, whatever you want to use as the terminology, needs to include other forms of energy as well.

So we’re seeing in the last week that China has been talking about putting a date certain by which it will stop selling cars that use petroleum. Now this, I’m sure, has something to do with the environment. But I think China also realizes there’s strategic benefits to being a leader in these renewable energy technologies. And I think we risk losing that.

However, I would say my real critique of energy dominance is we can’t focus—and this is a theme in the book—just on production. That if we are looking at trying to find a way to create a policy or a strategy that maximizes this moment for the United States, it requires doing other things as well. Not just looking at production, but looking, for instance, our non-energy foreign policy and thinking about how that affects energy. So our position on trade affects global energy demand, which affects American energy exports. Looking at our policy towards Mexico, you know, that policy could backfire and have implications for this. And it also requires taking advantage of the strategic environment, the changes that have been made in the non-energy realm. So this has opened up possibilities for cooperating with China. So a real strategy would take advantage of that as well.

YERGIN: So let’s focus on those two countries. How has this changed the U.S.-China relationship equation? And then we want to talk about NAFTA—the discussions with Mexico, how this all fits in. So let’s take China first.

O’SULLIVAN: Sure. So my argument is I’m aware that China and the U.S. are—we’re going to have a difficult relationship for the foreseeable future. I know that this is the case. And so as I think policymakers and concerned citizens and everyone else should be looking for places where we have common cause. And we can build, you know, little islands of cooperation in the hopes that those will build relationships and modes of interaction that can possibly affect the rest of the relationship. And so, there are many ways. And this new energy environment I think creates those openings.

So just very quickly I would say, one—and I’m happy to expand on this if people are interested—one, I think that this energy-abundant environment actually opens the space for China to be more comfortable in the current international order. And I can talk about why that’ the case, but of course that’s one of the big questions that a lot of people in this room are concerned about. Is China going to remake the order or can it live within it? And I think the energy abundance, you know, affects that calculation in ways I’m happy to talk about.

I also think that it created a real opportunity to work on climate issues with China. And that, I think, is one of the casualties of us potentially or actually withdrawing from the Paris accord, is simply that this was an area where we had common interests and we actually had credibility because of the shift in emissions made possible by the natural gas boom to really get in there, negotiate with China, come to an agreement, and then catalyze the Paris accords. So that’s a soft power thing.

And then going back, you know, to the Middle East, I think we have—there’s an opportunity for the U.S. and China to work more closely on that. You know, these are areas that are maybe outside of Asia, but would be useful to—

YERGIN: And on Mexico, how concerned are you about—I mean, how does energy fit into the kind of more truculent relations between the U.S. and Mexico now?

O’SULLIVAN: Sure. Energy is a—I mean, obviously our relationship with Mexico has many, many facets. Energy is an important one. And I think that it’s often overlooked how integrated we are with Mexico in terms of energy. I don’t know how many Americans know that Mexico is the largest importer of American natural gas. And that is likely to grow, you know, very significantly over the coming years if Mexico continues its energy reforms, because their energy reforms are tied to their prospects for economic growth, which the Mexicans have up until this point decided, well, we have our own natural gas, but we also could import natural gas from across the border. It’s cheap. It’s available. Let’s build pipelines and let’s just encourage that integration.

They may decide that that actually creates a strategic vulnerability in this political climate that they hadn’t considered before. And if we go to the negotiation of NAFTA, here, I think, you know, there’s huge, huge elements that could be lost if, say, NAFTA is abrogated, in the sense that if you are working for an international energy company in Mexico company, you want a piece of American equipment, you know, it might take you, someone told me, 36 hours to get it from anywhere in America to Mexico. This might be 36 days if you’re in Colombia and it might be exponentially longer if you’re in Argentina. So, you know, that kind of seamless interaction is really beneficial to American companies, to natural gas and really oil production. And all of these things could be lost if we kind of head down a more confrontational road.

YERGIN: So, Meghan, one more question before we open it up to the audience. Is there a sort of energy geopolitics dimension to the complex of issues with North Korea?

O’SULLIVAN: Sure. It is interesting, in this, you know, real difficult situation we find ourselves in, where the options—none of the options are attractive. I think the understandable focus is on a diplomatic answer to this crisis. I’m skeptical, but given the unattractiveness of a military option or the risks of a deterrence option, I think it’s the one to go for. There are lot of parallels people are using saying, you know, we could employ an Iran strategy on North Korea, put a lot of sanctions in place and bring North Korea to the table. Energy obviously is a big part of that sanctions package. Even North Korea’s very, very small economy, to the extent that it has links with the global economy, a lot of them are energy in nature. They’re coal exporters and they’re oil importers.

I think the analogy with Iran is of limited use for two main reasons. One, there isn’t any kind of domestic political mechanism. So, you know, I’d like to make the case that sanctions created pressure that led to Rouhani’s election, and then he was elected with a mandate to negotiate. There’s no such mechanism in North Korea. So we’re really talking about influencing one individual, as far as we know. And secondly, there’s a lot of interesting work being done about, well, maybe the North Koreans could really substitute for their oil with coal to liquids technology. This, you know, I think is expensive. It would create problems—

YERGIN: Have we heard if they have any of that capability?

O’SULLIVAN: The thought is that they do have some of that capability, and they certainly have enough coal that they could do that, especially now that their coal exports are coming down. There’s a report by IISS on this saying that they could easily do it. I don’t know that they could easily do it, and it would be expensive. So it wouldn’t totally end all that. So I think there’s an energy dimension, but energy is not the answer here.

YERGIN: Right. Well, let’s open it up to discussion. And there are two mics in the room, or maybe three. And so ask questions, your name, affiliation, and a question not a speech. So go for it. There are several hands up there. Let’s start with—there’s Mark. You got to stand up. Do the microphones come to them or do they go to the microphones? The microphone is on its way to you, Mark.

Q: Thank you, Dan. Mark Finley with BP.

Meghan, congratulations. I look forward to reading it all.

I have—my question is, it seems to me that a lot of what drove this American windfall doesn’t really have so much to do with energy as it does with the above-ground factors, the way of life. You know, whether it’s the financial markets, the business system, bankruptcy laws, whatever. And I’m wondering, do you see evidence around the world that countries are looking at—you know, looking through the lens of the energy revolution to say, oh, it’s about the way of life. Can we reform, you know, our political, economic, social systems to—and/or do you see evidence that U.S. policy makers are saying this is a lever for us in terms of our strategic advantage to promote these broader concepts? You know, and using energy just sort of as the window into those broader questions.

O’SULLIVAN: Great. Thanks, Mark. And thanks for coming today.

It’s a great question. And I would agree entirely with the premise that what happened in the U.S. is not just about geology. A lot of it is about the institutional environment, the financial markets, the nimbleness of small companies. All of these things were critical in the energy outcome here. And as we know, five years ago around the world there were lots of countries that were very optimistic about their ability to replicate this, and very, very few have. In fact, only a couple of other countries are producing in commercial quantities, and they’re still very, very small quantities. So it has been very hard for them to reproduce this.

But the interesting bit, the geopolitical bit, is what you get at. You know, how much has the U.S. government thought: This is something that we might be able to use—you know, to use as an entree point into conversations around the world? And I talk about this in the book, that in fact our State Department in the earlier days of the boom really did try to respond to other countries that were interested. You know, tell us how you wrote your laws. Tell us, you know, what institutional factors made a difference. These programs sort of limped along, not because there wasn’t demand for them, but there just wasn’t a lot of funding. And my understanding was there was nervousness within the Obama administration about promoting the development of these fossil fuels overseas while there were still environmental concerns at home. So they kind of did not reach their full potentials while there were still environmental concerns at home. So they kind of did not reach their full potential.

YERGIN: I mean, Secretary Clinton did have a global shale gas initiative.

O’SULLIVAN: She did. She did. And I think it could have been even more than it was. And I think the potential is still there.

And, going back to the idea of soft power, this is a way not only for America to help other countries, you know, develop their own resources, but it gives us a seat at the table to talk about issues that are hard to talk about in other contexts. You know, it’s hard to talk about transparency, rule of law, anticorruption, and not sound like you’re lecturing. But if you’re doing it in the context of actually helping a country understand here are some of the variables that are required to be successful, then I think you could have a qualitatively different conversation. Unfortunately, and I’ll end on this, it seems like, you know, the budget cuts in the State Department would actually further degrade that capability rather than augmenting.

YERGIN: Right here.

Q: Hi. Joe Cirincione, Ploughshares Fund.

Thank you very much for this terrific talk. Could you unfold a little bit the issue of China and the—I believe their goal is 2040 for when they want to phase out the production of combustion engines. What does that mean for energy abundance? What does that mean?

YERGIN: Well, let’s first say it was an assistant minister who said it. There are other forces in China who immediately said, actually, we disagree with you totally. So I think it’s a little—

O’SULLIVAN: It’s still an option—

Q: OK, could you unpack and then unfold? (Laughter.)

YERGIN: Unpack.

O’SULLIVAN: OK. And, you know, again, I told Dan, jump in at any moment here, because I know we’d like to hear his views on this as well. So I think, you know, Dan’s point is exactly right. This is—it’s still unclear where China is going to end up on this. But it’s interesting that this debate within China on, you know, calling an end to the sale of fossil—or, petroleum, rather, based cars, is in the context of both Britain and France this summer actually saying: 2040’s the date we’re no longer going to sell these kinds of cars. So you have Britain and France already making that as a policy initiative. And then China, which obviously matters a lot more in terms of global energy markets and automobile markets, debating this.

And so I think the significance there—there’s a couple of things. One is, you know, what’s driving this? I think in France and in Britain there were a lot of environmental concerns driving it. And in China, I think that’s partially the case. But as I indicated, I think it’s also a recognition that, you know, China can really—there can be strategic advantage in being a leader on the technologies. And just those signals—I mean, just think about what those signals of Britain, France, and then potentially China, given that this is—this is a finite gravy train. So, I mean, that, I think, really does change the conversation.

I’ve said to a couple of people today that I’m always interested when I go to Saudi Arabia what questions people are asking me. So, 2014, everybody was asking me, what’s the break-even price for shale? You know, that was—like, everybody was focused on that, and that was critical. And when I was last there, not quite a year ago, but all the questions were about electric vehicles. And so the nature of the conversation has changed. So even if we don’t know when that moment is going to come, there’s an expectation that it will come. And that change in mindset will start to affect decision making and behaviors as well.

YERGIN: So any people in this audience own Volvos?

O’SULLIVAN: Yeah, there’s the Volvo decision.

YERGIN: Well, no, because I’m asking about Volvos because it is a Chinese car. It’s owned by a Chinese company. But I think the point that Meghan made, it’s not just about leader in technology, but it’s being a leader in the global automobile market, and a sense that perhaps with electric cars they could leapfrog over the well-established and more advanced international competitors.

O’SULLIVAN: Yeah. And Volvo made the commitment by 2019 no more—

YERGIN: Well, even that was kind of misleading because they said, well, it could be a(n) electric car, or it could be a mild hybrid.

O’SULLIVAN: Hybrid, yeah, exactly.

YERGIN: And a friend of mine went to see the new Volvo. And on one charge, you get 14 miles. So that’s a mild hybrid, so. (Laughter.) So it’s a little unclear.

The lady in the back. Oh, there are two ladies. In order we’ll go.

Q: Staci Warden. I run the Center for Financial Markets at the Milken Institute.

And the road to national prosperity and economic growth, I would say, is strewn with the dead bodies of oil-producing countries and nations throughout history—you know, be it from Dutch disease to corruption to now, you know, oil price volatility on banking sector stability. And I was wondering if you have a view on that with maybe a geopolitical patina. Brad Setser at the Council on Foreign Relations has just written that the U.S. is now a commodity exporter rather than a capital goods exporter as a result of shale and other things. And do you have a way of thinking about that and lessons for, you know, the U.S. and other countries that are oil exporters?

YERGIN: So we’re still exporting—we’re still exporting Boeings. So I don’t think we’ve stopped doing that.

Q: I mean, net—on net, though.

O’SULLIVAN: Yeah. So two quick reactions. First, on the U.S., you know, I sometimes get questions from my students, like, well, so is the U.S. going to be subject to Dutch disease? Is this, like, a new worry? Is the resource curse going to apply to America? I think despite the fact that this is a very large industry and an important industry, that the American economy is still so complex and there are so many other sectors to it that I’m not, you know, so much concerned that we’re going to bear the same effects that you have referenced in other parts of the world.

However, you know, I think that this story is still very much playing out in other parts of the world. And one of the most interesting things to watch from this energy abundance is the effect that it’s hard on Gulf countries, and Saudi Arabia in particular. And so the reform efforts that we’ve seen conceptualized and, you know, begun to be implemented—although there’s been some stalling—in Saudi Arabia in particular I think would have never happened without this shift in energy. So it’s not just that there’s more energy on the market. As I describe in some detail in the book, it is that this shale oil or tight oil introduced a new business model, which has made it very hard for oil markets to work in the same way as they did before.

So the Saudis, I think, are now coming to terms with the fact that they don’t just have to survive the lows in anticipation of the highs, but they’re in a totally different new oil market world. And so they still have time. They still have resources. But the need for reform so that they don’t become one of these bodies along the sides of the road that you described is very, very real. And I think anyone who travels to the Kingdom and has the opportunity to meet with the crown prince or other people, you know, really get the sense that they understand that reform is an imperative if they’re going to survive. Which doesn’t mean that it’s inevitable that it’s going to be successful, but I think there’s a seriousness that maybe hasn’t been there before.

YERGIN: The lady right there.

Q: Thanks. Barbara Slavin from the Atlantic Council. Nice to see you.

To what extent did the shale oil revolution detract from our ability to develop renewables? Was it a—was it a diversion that in environmental terms is going to be very expensive? Thanks.

O’SULLIVAN: Yeah. I would say—Dan, as always, jump in if you like—I would say this is still an object of debate. There’s the very obvious point that not so much oil, but natural gas is an easy substitute for renewables, as well as for coal. So, you know, when we do the net-net on the environmental side, we need to take the whole element of the substitution effect into account.

So, unquestionably in some cases where renewables might have been seen as more attractive, very, very low natural gas for the foreseeable future makes that less so. However, if you look at the statistics about renewable energy investment in the last few years, even in the context of very, very low natural gas prices those numbers have still been quite high. Of course, you know, there’s subsidies and there’s a lot of government policy in there that we have to take into account, but we can’t really yet point to a precipitous drop in investment in renewable energy and attribute that to low-priced natural gas thus far. So there’s also just, you know, the way in which that natural gas, at least for now, is a complement to a lot of renewables because they’re intermittent energy sources.

YERGIN: Yeah, that last one is very important, because of the intermittency. But to make sure that Meghan’s not misunderstood, there has been no precipitous decline in renewable investment. The subsidies and incentives that went in in December 2015 are very powerful and continue to provide great incentives, combined with state mandatory requirements for renewables. So that marches on.

Spencer Dale.

Q: Hi. Spencer Dale from BP.

I wanted to go back to this energy dominance and asset—liability-to-asset issue a little bit, and it touches on the Dutch disease issue as well. So I 100 percent agree that the shale revolution has fundamentally changed the U.S. economy: huge benefits for the U.S. economy, and meant that that huge liability in terms of it being a massive energy importer has been neutralized. The bit I am struggling with, that it’s now gone the other way and it’s a huge asset. The U.S. is still a net importer of energy. It is still one of the largest importers of oil in the world. It will carry on under most scenarios being an importer of oil until the sort of 2030s or so. So I understand why that liability has been neutralized, but I’m not quite sure how this has now become a big asset and how one can get to the world of energy dominance.

YERGIN: Are you—are you thinking “asset” in a financial term or are you thinking of it in a strategic term?

O’SULLIVAN: In the way that I used it.

Q: In the way you used it.

O’SULLIVAN: Yeah, which was more generalized, yeah.

Q: In a—in a foreign policy context, it was a liability and now it’s an asset. And I can understand the—I can understand the liability being neutralized, but we should remember the U.S. is still a net importer of energy and is still—and will carry on importing oil for many, many years to come.

O’SULLIVAN: Did you want to say something before I—

YERGIN: Well, I as just going to say, I mean, but it is true that our imports have gone from net 60 percent to 21 percent, and the—you know, half of those come from other countries in North America. But that’s a preamble to your answer.

O’SULLIVAN: No, no, but that’s great. Thanks for getting those statistics out there.

So I’m using the phrase “asset,” and this gives me an opportunity to elaborate a little bit on a point that I made quite quickly before, that I think it’s probably fair to say that many in the foreign policy community look at this and they think, like, great, do we have like a foreign policy cudgel? You know, do we now—can we now use energy exports to, you know, force countries, to punish our adversaries or, you know, aid our allies? And we saw a little bit of that when President Trump went to Poland and he talked about, you know, natural gas being able to displace Russian exports to Europe. And I think people, they naturally are looking for, like, something very tangible.

And my argument is that the asset component of this is more in the realm of changing the strategic environment, and augmenting American sources of hard and soft power. So that’s the asset. So it is less of a sense that we can suddenly use exports to make others do things we want to do. There’s more subtlety to the argument, but my argument is that, in fact—that, in effect, augmenting sources of hard and soft power, and changing the environment in a variety of ways through markets, actually has an appreciable benefit and puts America in a better position to—you know, on the whole. There’s some, you know, liabilities that come with it, but in a better position to advance its interests.

YERGIN: So we’ll pivot. We’ve been on this side of the room. Pivot to this side. And we’ll pivot with Antoine and then we’ll go down that side. Antoine.

Q: I was curious—

YERGIN: Identify yourself.

Q: Oh. Antoine van Agtmael, FP Analytics.

I was curious, the impact of innovation in the oil and gas industry has been faster than many of us expected, and the impact on, let’s say, solar or battery of innovation has been slower than we expected. That’s for the past years, and still solar has declined faster in price than oil and gas. What do you think—hard question, but what do you think will happen over the next, let’s say, decade?

O’SULLIVAN: Yeah. This is a question that I’m going to demand Dan give his response to. (Laughter.)

YERGIN: Well, I was looking forward to your answer.

O’SULLIVAN: It interesting if you read—so many of us in this room probably read—the National Intelligence Council comes out with these Global Trend Reports every four or so years. And if you read the 2008 National Intelligence Council report, it talks about this coming energy transition and how this could change global politics, but it’s all about the renewable space and not about the oil and gas space, where actually things were already happening at that point. So, you know, I think it’s right to put a big question mark around this.

My sense is that there will still be technological advances to affect the oil and gas revolution. So I wouldn’t say that we’re at the end of that at all, that there’s still some runway to be covered. And so we can still expect technology to have some impact on our ability and the ability of others to produce more maybe for lower prices. You know, that will eventually kind of come to a halt.

On the other side, you know, there’s some quote—and I don’t know who to attribute it to—it was like technology, you know, moves much more slowly, but then when it arrives it happens, you know, much more quickly than you expect. And so, you know, this—

AUDIENCE MEMBER: Rudi Dornbusch.

O’SULLIVAN: I’m sorry?

AUDIENCE MEMBER: Rudi Dornbusch.

O’SULLIVAN: Rudi Dornbusch. Thank you.

And so, you know, that’s I think what we’re all waiting for on the battery side, you know: When is that moment going to come? And if you told me in the next 10 years that the speed of these relative sectors and the rate of technology in transforming them would switch, I would completely believe that. You know, I think I’d—I could imagine that the next 10 years, if we were sitting here or if we are sitting here in 10 years, that we might be talking a lot about the geopolitics of renewable energy.

And I’ve started to look into that already because I think it’s a very interesting space. If you—if you agree with the premise that the energy mix really affects global politics, if we’re moving to a different kind of energy future—as I think we inevitably are—then we should expect there will be a big change in global politics that will go with that. And I think that is a really—an area ripe for—ripe for investigation.

But, Dan, your view.

YERGIN: Well, I think whatever happens to federal spending in this area, I think there’s a lot of momentum on renewables, alternative technologies. We at IHS Markit are doing a big study now trying to understand the technology innovation pathways in the United States for new technologies. So I think—I think there’s going to be momentum there.

So I think it’s sort of—as to which goes faster, I don’t know. Obviously, renewables—solar has benefited greatly from overcapacity in Chinese manufacturing, the relationship between local governments, and is there any reason to think that won’t stop? I’m on the advisory board at the MIT Initiative, and I once asked, you know, what are more people working on than anything else, and it’s solar. Maybe it’s now batteries. I don’t know, maybe it’s shifted over the last couple of years. But I think there’s enormous innovative effort that’s going to continue, and that the funding, whether it comes from government or not, will be there for that.

Q: Overcapacity on both sides. Gas too.

YERGIN: Yeah, that’s right. But it is—that’s right. But, you know, the—there are a lot of incentives. I mean, on an electric car, you look at a Norway, I mean, the electric car is virtually free from the government if you get one. I mean, you have to pay for it, but every—

O’SULLIVAN: A Tesla, no less.

YERGIN: Yes, exactly. There’s a reason for that.

I think there’s some questions down this side now. Yes? Maybe not.

O’SULLIVAN: Yes, right there.

YERGIN: Somebody have their—the lady there had her hand up. Oh, yeah.

Q: Sherri Goodman, Woodrow Wilson International Center. Thank you. The book is terrific, and thank you for your research.

So continuing on from Antoine’s question, really for both of you, unpacking a little more the opportunities in the advanced energy economy as we move eventually towards electrification of the vehicle fleet, and regions of the world in Africa and India emerge from energy poverty through different mechanisms than we’ve seen historically and maybe leapfrog into certain renewable sectors—and also including nuclear, the potential revival of a nuclear industry—what do you see for the emerging advanced energy markets? Give us your vision, Meghan, that—

YERGIN: What do you mean? What do you mean “emerging advanced energy”?

Q: Well, I mean, the nuclear—the geopolitics of both nuclear and the—and the renewable energy markets that you’ll see. As you’ve talked about, we unexpectedly find ourselves in fossil energy dominance now, but should be—should we also be seeking a quest for energy dominance in other sectors?

O’SULLIVAN: Great. Thanks, Sherri.

YERGIN: You adopted energy dominance, and that was our—(laughter)—(policy ?), OK.

O’SULLIVAN: I’m trying to get people to talk “windfall.” That’s what I’m trying to—

YERGIN: Yeah. Yeah, or “strategic boon.”  “Strategic boon.” (Laughter.) Yeah, “strategic boon.”

O’SULLIVAN: “Strategic boon.”

So, on the renewable side, I really—you know, going back to what I started to talk about, I really do think there will be geopolitical implications of this. I held a small workshop on this in Berlin in March, and I invited—it was mostly Europeans, and it was interesting. I felt like, you know, if you’re in a room and sometimes you feel like there’s lots of resistance to what you’re saying. And finally, you know, I kind of tried to figure out, like, what’s the resistance? And people said, you know, why are you saying all these bad things about renewables? And I was saying, I’m not. You know, I’m all for renewables. But just we have to assume that a change in the energy mix brings about a change in politics, and that some of it will be good and some of it will be bad.

And so I think on the good side, you know, there’s a huge potential to alleviate energy poverty in big parts of the world that, you know, haven’t invested in fossil-fuel infrastructure already, and will never do so because it’s the potential to kind of, you know leapfrog over that. So I think that is definitely a net geopolitical benefit.

But then we also need to think about, OK, in a world in which we’re relying a lot more on renewable energy—and so IRENA—the International Renewable Energy Agency—based in Abu Dhabi but a global institution, they’ve done a scenario out to I think it’s 2050. They say 70 percent of the world could be run on renewable energy—70 percent of the world. So that’s interesting. That was kind of, OK, let’s take that scenario; what does—what do global politics look like?

And there we have to think about, like, what are the vulnerabilities of a global economy that is so electrified? So there will be—there will be vulnerabilities. So you’ll think about grids. You’ll think about cyber. A lot of these things will be even more important than they are today.

And, of course, you know, it just bears keeping in mind that because something is electrified doesn’t necessarily mean it’s better for the environment, depending on what your source of electricity is. If it’s coal, then it’s worse for the environment. If it’s natural gas or renewables or nuclear, this—you know, this could be beneficial for the environment.

YERGIN: And it’s interesting to take that—I mean, to talk about 70 percent in 2050 as a scenario. About 82 percent of the global economy now is hydrocarbons, so that would be—were that to happen, it would be a big shift.

O’SULLIVAN: It’s a dramatic shift, yeah. Exactly.

YERGIN: There’s a question right in front here.

Q: Hi Carolyn Campbell. I’m a large private-equity investor in emerging markets.

My question relates to the United States, and I do have a question on windfall. Does the windfall that you’re discussing extend to the United States’ Rust Belt? And you see in other areas where you have a natural gas boom that there are related industries that develop: heat exchange unit producers, producers that can—production that can revive potential former industrial centers on the basis of the cheap energy. Do you think that the windfall could upend the former Rust Belt in that sense?

YERGIN: I just sort of thought windfall, we don’t mean wind. I mean, we’re talking about—

O’SULLIVAN: Right, right, right.

YERGIN: Let me jump in there, yes, because we looked at that pretty carefully. And even in New York State, which banned fracking, there are 50,000 jobs that derived, and big boost to the Rust Belt manufacturing came from these whole long supply chains from shale. A lot of jobs in the Midwest resulted from that, and we basically saw about a doubling of capital investment in the United States as a result of this. So the supply chain side of it, that’s why you got up a couple million—added a couple million jobs, and that was not well-perceived. It was not just jobs in the Permian Basin. It was also jobs in Ohio and Michigan.

O’SULLIVAN: Right. And just completely consistent with that is that it’s not just jobs for production, as Dan was saying, but also the lower natural gas price is a competitive edge in manufacturing. So you’ve seen a number of companies actually bring investments back home. This is actually true. You know, we’ve seen some of that. We’ve seen actually some German companies invest in the United States—

YERGIN: Well, in fact, I think it’s $125 billion—good point—of new investment in manufacturing in the U.S.—I think that’s the last number—as a result of the competitive energy prices that came from gas. And as you say, many European companies, even Chinese companies investing in manufacturing in the United States because of that.

O’SULLIVAN: Because of that input cost, yeah.

YERGIN: I think is there a last question? Right there.

Q: Thank you. John Hauge, Global LPG Partnership.

You haven’t touched on coal yet. So I was wondering if you could give us a few words on that, particularly whether it has a future at all as a transition fuel, given the fact that foreign budgets may reduce in terms of renewables. And is there anything on the technology horizon that could create that oxymoron “clean coal”?

O’SULLIVAN: Yeah. I’m of the crowd that’s still waiting for this clean coal. You know, what exactly is it? And wouldn’t it be a great thing? But I haven’t seen much evidence of it. You know, you go to China and there’s a lot of talk about clean coal, but not a lot of evidence of it.

In terms of what is the future of coal, I think it depends on what country you’re asking the question in. And looking at the big economies of China and India, those are the places to watch to really see if coal is going to be able to, you know, maintain its market share.

We’ve already seen the percentage of energy needs in China, which is maybe the most coal—I don’t know if it’s the most coal-heavy, but of the large economies—it’s somewhere like 64 percent of China’s energy needs are currently met by coal. That has started to come down, and I think there are huge incentives on the part of the Chinese to continue to bring that down.

Just how large that number is suggests that, you know, coal is not being phased out around the world. There are still places—you know, India being one of them—where they’re ramping up because they have such enormous energy gap.

So, you know, coal in the United States, despite the efforts of the current administration, I wouldn’t say there’s a big future here because I think natural gas, we’re looking at a future of—you know, a long future of low prices for natural gas and a variety of other factors which are going to continue to make it a preferred fuel. But in other parts of the world, I think it’s still an open question.

YERGIN: So, Meghan, we’ve covered a vast part of the world, a whole host of issues in which energy and geopolitics interact. I realize the only one we’ve left out is the question of U.S. LNG versus Russian gas in Europe, but we will have to leave that for next time. (Laughter.)

Meghan, thank you for writing this terrific book, and thank you on behalf of everybody today for a terrific discussion.

O’SULLIVAN: Thank you for hosting us. (Applause.) Thank you. (Applause.)

(END)