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Is America Stuck in the Middle East?

Guests: Daniel Yergin and Robert Ebel

BW: Hello, I’m Ben Wattenberg. Now more than ever observers say it’s a damn shame, but we’re hooked on foreign oil, particularly in the Middle East. And that makes it harder to fight the war on terror. It’s said that America defers to Arab despots, led by Saudi Arabia, the big daddy of the global oil patch. Do we? Must we? Do we have other options?
To find out, “Think Tank” is joined by Daniel Yergin, chairman of Cambridge Energy Research Associates and author of the Pulitzer Prize winning book, The Prize, The Epic Quest for Oil, Money, and Power. And Robert Ebel, director of the Energy and National Security Program at The Center for Strategic and International Studies and principal author of Geopolitics of Energy Into the Twenty-First Century. The topic before the House: Is America Stuck in the Middle East?
BW: Ever since the eighteen sixties when America first started using crude oil from Pennsylvania, experts have worried that the U.S. would run out of fossil fuels. As oil and natural gas became global commodities, some experts predicted that the world’s reserves were about to run dry.
But it hasn’t happened yet, and the predictions of possible reserves keep going up. Today, some experts say the world is awash in oil and that the problem is actually oversupply. Newly discovered oil fields in Brazil, the Gulf of Mexico, the Caspian Sea, and off the coast of West Africa are changing the nature of the world market. Energy conversation and new technologies have slowed the growth of energy consumption, keeping prices relatively low.
In America, for example, energy use grew by thirty percent in the last quarter century while the economy went up at four times that rate. But maintaining a secure supply of oil remains a problem, often a political one. One current debate today in the Congress involves whether oil should be pumped from the Arctic National Wildlife Reserve or ANWR. Proponents say ANWR could produce as much as sixteen billion barrels of crude. That’s what we get from the Saudis over the course of thirty years.
Still, for now the hinge of the energy situation is the Middle East with the majority of the world’s known reserves. Can that change? Is Middle Eastern oil still crucial to American security?
BW: Gentlemen, welcome to “Think Tank,” Bob Ebel, Dan Yergin. Dan, I have been, uh, looking through your Pulitzer Prize winning book, The Prize. There are some Pulitzer Prize winning books that I don’t think deserve to win the Pulitzer Prize; yours did. And it’s fascinating. I get the sense that it’s the same story going around and around again and again – too much demand, too much supply. Is that what’s happening now again?
Daniel Yergin: There is a sense that the wheel does get reinvented. We go from shortage to surplus. And again and again we see how geopolitics and politics collide with oil to create crises.
Robert Ebel: Well, you can look at it this way, if Saudi Arabia produced pineapples or Kuwait produced pineapples, would we be there in the way that we have been in the past and where we are today? No, it’s the oil that attracts us. It’s the smell of oil that is important to the entrepreneur, to the company, and to nations alike.
BW: And is it possible now when you go through all the combinations and permutations to say look, when those Twin Towers were slammed, we finally learned our lesson and we’re going to truly diversify our energy supply? And to a point where if the Middle East blows again, we’re not going to be completely vulnerable as we now are?
Robert Ebel: Well I think both the Democrats and Republicans grabbed upon that in the aftermath of September the eleventh to see if they could use this increased interest in reducing our dependence on foreign oil to push their respective energy proposals. Both have a common goal: reduce our dependence on foreign oil through different paths. Republicans say let’s increase supply. The Democrats, very simplistically, say let’s make better use of what we consume.
BW: Why is one very simplistic and the other not very simplistic? Aren’t they both simple? Forget simplistic.
Robert Ebel: They also have something in common. They’re both long-term proposals and they don’t offer the American consumer what he’s really looking for, which is the short term answer to our energy problems.
Daniel Yergin: I mean the thing to notice right now is prices are way down. If this crisis had happened last year, it would have had a much bigger impact in terms of…of….
BW: Well, but this crisis hasn’t cut down the oil flow, has it?
Daniel Yergin: No, right now supplies are not interrupted. What we have is one of the surpluses in the market, Ben, and that’s why prices now are, you know, are ten dollars a barrel less than they were this time last year.
BW: And you get this strange anomaly where people are saying well we’re going to pulverize the Taliban and Osama bin Laden, and then we’re going on to Iraq. And we’re still using Iraqi oil, aren’t we?
Daniel Yergin: Yes, it’s being exported under the UN program and, of course, that’s how Iraq is making billions of dollars.
BW: When you describe the Democrats’ plan, which is more conservation, and the Republican plan, which is more production, I mean it doesn’t take an oil geologist to say, duh, why don’t we do both? I mean isn’t this…
Daniel Yergin: And, Ben, let me jump in there. If you look back, the most relevant example is the nineteen seventies when we had the first major oil crisis that got everybody’s attention.
BW: And that’s when we had the gas lines.
Daniel Yergin: The gas lines.
BW: …the odd days for even number plates, right.
Daniel Yergin: And the panic and everything like that and the nation shook. That crisis was partly self-inflicted because of our control system, but what did we do? In fact we did two things that really stand out. One is we had fuel efficiency standards on automobiles, and two…
BW: That’s called the CAFE standard.
Daniel Yergin: CAFE, and two we…
BW: What does that stand for?
Daniel Yergin: Corporate Averaged Fuel Economy. And secondly…
BW: Very good.
Daniel Yergin: So, (laughs) I past the test.
BW: You should get a Pulitzer Prize.
Daniel Yergin: And the second thing that we did is that we did the Alaska Pipeline that brought oil from the North Slope, which was passed by one vote in the Senate, Each of those contributed about the same amount. If you say how did they change our energy mix, if we hadn’t done both of those, a few years later when we had the second oil shock with the fall of the Shah of Iran, we might have had a much more severe global economic crisis.
BW: Did the fall of the Shah cut off Iranian oil supply for a while? Is that what happened?
Daniel Yergin: Yes. That’s right. It was disrupted for a year, year and half, and that’s when we thought the apocalypse was here.
Robert Ebel: But today we couldn’t build the tap line, that Alaskan Pipeline, because of the environmental opposition. And today it’s harder to get improvements in the CAFE standards when you can buy gasoline at thirty-five cents a gallon cheaper than we did a year ago. What’s the incentive to the American consumer to tell his government I want you to take action to improve our domestic supply, take action to give us a higher fuel-efficient automobile? Where’s the incentive for him to do that?
Daniel Yergin: I mean the reality is that we import over half of our oil and the reality is that the Middle East looms large and we’ve had six or seven crises now that have been connected in one way or another to oil in the Middle East. So there is…
BW: What about these CAFE standards for the big sport utility vehicles, for the SUVs? There’s an exemption for those because ….
Daniel Yergin: It’s a lower level and I think it’s pretty likely, I don’t know what Bob thinks, that they’re going to be raised.
Robert Ebel: They’re classified as trucks, and that’s what got them the lower level.
Daniel Yergin: See it was when the only people who drove pick-ups and like that were like farmers, in the mid nineteen seventies. And so they got this exemption. No one thought that suburban soccer moms, who had not even been invented yet would be driving these huge, lumbering vehicles and that one out of two new vehicles sold in the United States has been a sport-utility vehicle type.
Robert Ebel: And they’re going to be around for a while. It’s going to take ten years to turn over our automotive fleet. So it’s not going to happen over night.
BW: What does OPEC do to this situation? I mean I was reading a recent speech of yours and you were saying that the oil business is more market driven than it used to be, but you do have a cartel. And when OPEC came on the scene everybody said well cartels never last; somebody always cheats; this will never last, it will collapse; and here we are, what twenty-five years later and we still have the cartel.
Robert Ebel: Well I think we’ve been a bit surprised by the success of OPEC in being able to maintain prices to the extent that they have but…
BW: And the Saudis basically having the extra cheapest marginal barrel of oil, is that right? They control OPEC prices in effect?
Robert Ebel: They have what spare producing capacity, and they can keep their hand on the lever; and if you don’t behave yourself, we’re going to put some more oil into the marketplace. But I think today Saudi Arabia has about half the spare producing capacity in the world. So if we lose Iraq, okay. Don’t lose Saudi Arabia, because we really have no way to make up for the loss of Saudi Arabian crude should something happen to that country.
Daniel Yergin: I think that OPEC has had several near-death experiences. And at the end of the day it ends up more or less following the market, because I do think that, at the end of the day, supply and demand determine the price. They can effect things at the margin, when prices go to ten dollars or collapse they can cut back and kind of get the price up. What we’re seeing right now, they’re, I mean basically they’re gonna follow the market and try to adjust to it. They can’t overwhelm it.
Robert Ebel: If you follow supply and demand and how it works, when prices decline they contain the seeds of a price increase because declining prices adds to consumption but reduces the incentive to bring on new supplies. Pretty soon then demand catches up with supply, begins to exceed it, prices begin to rise, which in turn contain the seeds for price decline. Because a price increase brings more new oil onto the marketplace, which is exactly what has been happening and it dampens demand. One of the major factors today is the rise in non-OPEC oil production brought about by high oil prices. Saudi Arabia hasn’t always been king. And as recently as the middle of the nineteen eighties, Russia alone was producing more oil than Saudi Arabia and had been for some time.
BW: Can that situation reoccur if the former Soviet Union or Russia particularly gets its act together?
BW: Oh, it’s an interesting point that you raise. I think the potential is there. I’m not just sure that there’s the desire on the part of Russia to have foreign investors come in to the extent needed, nor would the foreign investor be attracted to Russia at this time. But certainly the potential is there, and it might be worthwhile exploring with the U.S., Russia, and perhaps members of the European Union, who would really like to work together to get Russia back in leadership and help replace some of the influence of Saudi Arabia.
Daniel Yergin: Right. There are two things to note about Russia that follow from what Bob has said. One is that the Russian oil industry really tanked out because of lack of investment. It’s come back and we’re seeing an increase in non-OPEC production, and it’s really led by recovering the Russian oil industry. The other thing is of course as part of what’s happening in this global coalition, we’re seeing a change in the U.S. relationship with Russia and with China.
Robert Ebel: Much closer.
Daniel Ebel: Much closer and with Russia that one aspect of it is that we may see much closer economic cooperation. Bob makes the point though that you now have these emerging Russian oil companies. It’s not clear that they want Western investment, but the economic relationship is quite different.
BW: Can we visualize a day soon when the cartel is in effect broken because we have sufficient non-OPEC supplies? I mean if Russia increases if you…
Robert Ebel: Well, what would happen if prices stayed at ten dollars a barrel as they were a couple years ago? The first oil production that goes out of existence is on-shore oil production in the United States because it’s high-cost production. So the system is a complex international…
BW: But, you know, you always hear this. I mean you touched on it before, that we say we want cheap oil and secure oil. But in point of fact both the domestic oil industry and the diplomatic arm of the United States, the State Department, do not necessarily want cheap oil.
Daniel Yergin: Well I think there is some, shall we say, contradiction between cheap oil and secure oil because, as Bob says, if you have cheap oil, you wipe out a lot of production and it tends to gravitate back to the cheapest areas to produce oil.
BW: Which are the Saudis?
Daniel Yergin: Well, the Middle East.
BW: It’s the Middle East and …
Daniel Yergin: Because of the size of the reservoirs, because the volumes are so huge.
BW: So who has who over an oil barrel? I mean if the Western countries said, you know, we don’t really need your oil, go drink it--the way Nixon apparently told them--Saudi Arabia’s a country that’s in debt, isn’t that right? I mean they would get hurt but …
Robert Ebel: Fortunately for Saudi Arabia they understand that we can’t tell them that.
BW: And so when our geopolitical people say the Saudis are financing, wittingly or unwittingly, or not being tough enough on the Islamist terrorists, we really can’t tell them well go, you know, go fish because you better do it or else. I mean that’s the problem, is that correct?
Robert Ebel: Well we could tell ‘em we’re not going to buy your oil.
BW: But you’re saying that…
Robert Ebel: We’d just have to buy it from someplace else and their oil would go to another country or to a third country, and it’s business as usual from terrorists.
Daniel Yergin: I mean as long as you have economies like China and India, forty percent of world’s people, and the demand for oil growing under normal circumstances, you know you need the supply, and Saudi Arabia’s an important part of the supply. And that’s where the interdependence…I mean what countries like Saudi Arabia and others learned in the nineteen seventies… We learned about dependence, in the nineteen eighties when they saw the price go to ten dollars a barrel and they lost market share, they realized they’re dependent upon us too; dependent upon us for the security relationship, they’re also dependent upon us as their market. And there is a two way street that doesn’t address the other questions that you’ve raised. But there is an interdependence there.
Robert Ebel: Doing it just on the supply side isn’t going to solve your problem. Neither is it to be solved just by concentrating on the demand side. You’ve got to bring the two together. Let’s do what we can to make the best use of the remaining potential of this country in terms of oil and gas production.
BW: And so you would favor drilling in ANWAR?
Robert Ebel: I would favor drilling in ANWR if the American people understood that drilling in ANWR alone is not going to solve our energy problem.
BW: No, it’s part of…right. And do you favor drilling of ANWR?
Daniel Yergin: Well I think it’s really part of the larger question about the direction of U.S. energy policy. I think you have to look at both supply. I mean there are other things that…
BW: Okay, I’m just on the supply side, you favor that? I know it’s not the whole…
Daniel Yergin: Yes, I mean I think, in a sense, ANWR depends… you know, there’s a huge argument about it but actually no one really knows what the volumes are that are there and that’s the very critical question. Is it a really big thing? Or is it not? But let me say there are other things that are very important, which is drilling in the deep water Gulf of Mexico, and being able to develop our natural gas resources. There are lot of things in on this. ANWR is not the only thing.
BW: No, no; I understand and on every one of those there is a NIMBY, not in my backyard kind of coalition saying, I mean off the coast of Florida they’re saying….
Daniel Yergin: But we have to…
Robert Ebel: …Don’t drill off my coast.
BW: Right.
Bob: And in the Midwest and far west, don’t drill on our federal lands. We want to maintain these.
Daniel Yergin: Where we have drilled is like off-shore Louisiana, off-shore Texas in the deep waters, and it’s like the manned space program, these are incredible technological achievements, what’s now happening, the depths that they’re drilling and finding it’s like new horizons. So it goes back to your original story, we started running out of oil in this country in the eighteen sixties and seventies and we do find new supplies. But the other part of it, I think Bob is saying, is we have to develop supplies, see supplies developed around the world.
BW: So from a national interest we want to protect ourselves against disruption and blackmail and lack of supply. I mean they’re all wrapped together.
Robert Ebel: That’s what our Strategic Petroleum Reserve is set up to do. That’s the lesson that we learned out of the 1973-1974 crisis. You’ve now got in storage about five hundred and forty-five million barrels of crude oil, and we’re working to add to that. We can draw upon that supply in the event of a serious interruption. Now don’t use the Strategic Petroleum Reserve to mitigate prices, as has been done recently by President Clinton. Don’t do it. It’s there to offset a disruption. Europe has its own strategic stocks to draw upon. So….
Daniel Yergin: And just to give you the numbers, it could compensate if we lost the Persian Gulf, all of the supply from the Persian Gulf for nine months. We could make it up from the Strategic Petroleum Reserve.
BW: From what we have there now…
Daniel Yergin: Yes.
BW: …or what it’s…
Daniel Yergin: What’s there now.
BW: …or what its capacity is?
Daniel Yergin: Capacity is much higher. What we have there now would take care of nine months of Persian Gulf oil. Of course, then the reserve would be empty.
BW: Could anyone imagine a situation where a group of nations, say the ones in the Middle East, I’m thinking specifically I guess of Iraq and Iran, I guess to a lesser extent Saudi Arabia, could get trillions of dollars poured upon them and end up not particularly better off than they were before? I mean take Iraq and Iran, I mean hasn’t there been this incredible flood of money coming into those countries and it’s just been swandered. Is that accurate?
Robert Ebel: Very much so. We say that these countries have caught the Dutch Disease, that what in effect has happened is that this tremendous income derived through oil exports has inflated the value of their local currencies, making it cheaper for them to import whatever they need goods and services, they’ve become totally dependent on oil. And, as we know, the price of oil is volatile. When it goes up, everything is fine. When it goes down, these nations find themselves in terrible financial difficulty. But it’s been ….
BW: And they also spent a number of years killing each other. I mean when Saddam Hussein invaded Iran, they were at war.
Daniel Yergin: Went on for almost eight years.
Robert Ebel: Because there’s a certain power of oil. And if you can control the reserves, which is really what you’re after. It’s not necessarily current production. Give me the control of the reserves, and then I can call the shots.
Daniel Yergin: Yes. I mean, that’s what Saddam Hussein wanted. What did he want to do? Wanted to dominate the oil reserves of the Persian Gulf and translate that into political power, economic power, and into military weapons. And he came pretty close to achieving his objectives. What does Osama bin laden want? Well, presumably, he’s been pretty clear, he wants to run the show on the Arabian Peninsula.
Robert Ebel: What would happen if the world suddenly lost Saudi Arabian oil?
BW: I’ll ask you that question.
Robert Ebel: Come to an end. I mean the economies would come to a halt. There’s really not much we could do.
BW: So you would set up an international yacht club and go in and protector it to reestablish the oil?
Robert Ebel: I would think what would happen is, if the royal family could see what was happening, that they were in danger of losing control of the country, they would invite in the United States or let’s say a UN force, to maintain control. We just simply could not go without Saudi Arabian oil. It’s too important to the world economy. And that’s not just the United States, it’s everybody.
BW: And what about this Caspian region. I mean there’s a huge oil puddle there. Is that right? Or don’t we fully know yet?
Robert Ebel: There’s been so much media hype about the Caspian Sea and what it might be able to provide to the world oil market. I would guess that by the year two thousand and ten, by the end of this decade, if exploration and production programs are successful, if we have pipelines in place to carry the oil to Western markets, the new oil coming out of that part of the world might represent three percent of the world oil supply; not replacing Middle East oil, not pivotal by any means but important at the margin because it gives the world another supplier. And those importing countries like Japan or the United States we seek security of supply through diversity of supply. So it carries importance in that regard.
Daniel Yergin: Or think of it as like another North Sea or something on that scale. Important but it’s not, based upon what we know today, it’s not another Persian Gulf.
BW: I keep looking for an easy answer here, for you guys to say well all we have to do is X--alternative fuels, photovoltaic cells…
Daniel Yergin: Switch the button.
BW: …nuclear power. You’re not going to give me an easy answer, are you?
Robert Ebel: I would guess, at least for this decade and the next that the kinds of fuel we’ll be consuming will be the same kinds of fuel we consumed for most of the twentieth century.
Daniel Yergin: Change might be in the development of these hybrid vehicles which are partly run on gasoline and partly run on electric batteries, that maybe get twice the mileage that your existing car gets. And so it may be just more efficient vehicles that will, you know, loom large in terms of what the technology is in the near term.
BW: What we talked about in the set up piece, we are not going to geologically run out of oil, are we?
Robert Ebel: Well I can look at Dan or look at you and say, in our life time, we don’t have to worry about the supply of oil running out ahead of demand for oil.
BW: On that semi-optimistic note, thank you very much, Dan Yergin for joining us and Bob Ebel, thank you. And thank you. Please remember to send us your comments via e-mail. For “Think Tank,” I’m Ben Wattenberg.

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