The U.S. could remain the world's largest oil producer in five years, no matter who wins the election, and oil demand should come back strong after Covid-19.
Dan Yergin, vice chairman of IHS Markit, explores these and other topics in a discussion with CNBC. Yergin, a Pulitzer Prize-winning author recently released a new book on the world of energy: "The New Map: Energy, Climate and the Clash of Nations."
U.S. shale oil producers changed the world of energy and provided the U.S. with new political leverage that comes with reduced dependence on foreign oil. How has the pandemic changed the outlook for the shale industry and U.S. dominance in energy?
The shale revolution was already in need of a second revolution before the pandemic.
This revolution is a change in its relations with investors, delivering not "growth at any cost" but rather "growth at what cost," and ensuring the investors get a return. That was already in process. But it has now become an even higher priority since the pandemic.
The shale industry is living through a Covid crisis. The fall in demand and prices has put added pressure on the industry. U.S. production reached its historic peak in February 2013 of 13 million barrels per day, and the U.S. will probably end the year down to 10.5 to 11 million barrels a day — which will still make the U.S. the No. 1 producer.
Expect more consolidation and bankruptcies. Companies may go bankrupt. Rocks don't go bankrupt, and output will probably start climbing next summer, assuming that the vaccines are being widely distributed.
Would a Democratic sweep of the White House and Congress endanger fracking?
A total Democratic sweep would likely mean more pressure on fracking and the oil and gas industry in general.
However, Joe Biden is not Bernie Sanders, and he would likely recognize that a policy to severely restrict fracking would really be an "import more oil policy" and "make U.S. balance of payments worse" policy — reversing the intention of every president since 1973.
Also, as Biden indicated while in the battleground state of Pennsylvania, there are a lot of jobs in the oil and gas industry — over 12 million before Covid. Natural gas fracking is big in Pennsylvania, and the industry has also been a substantial source of capital investment over the last decade. But more regulation could be coming across the economy.
The rise of the U.S. as a major force in the global oil market has changed the relationship between major producers. OPEC and Russia, for instance, have been cooperating on controlling production levels. How do you see these roles evolving in the future?
The emergence of OPEC+ — based on cooperation between Russia and Saudi Arabia — reflects the realities of oil markets today.
If you think about it, it was also a response to the disruptive technology called U.S. shale oil and the growing oversupply in the world market. I think this cooperation is likely to last for a while because it's in the interests of both Russia and Saudi Arabia — in terms of oil and in terms of wider strategic interests.
For decades, the drama of world oil has been "OPEC versus non-OPEC."
That is now history. Now I think it's the Big Three — the United States, Saudi Arabia and Russia. One of the most remarkable things I write about in "The New Map" is how the United States stepped forward to broker the end to the oil price war last spring between Saudi Arabia and Russia. That could not have been imagined a decade ago. But the United States now has a lot at stake, and it has the weight.
In five years, which country will be the largest energy producer?
That's a question not just about geology but also politics and economic growth — and in particular where politics goes in the United States. If U.S. output starts growing a year from now, I'd still say the odds favor the United States.
But a lot could change. If not the U.S., I think I'd put Saudi Arabia ahead of Russia. Whatever, at the end of the day, it's the Big Three.
The pandemic has hit the energy industry hard, slowing demand for oil around the world as the travel industry and other activity remains stalled. Some say demand will not grow as it has in the past. Do you believe this?
I think demand will likely grow more slowly, although I have the view in my book that oil demand does not peak until the early 2030s. I know others have reasonable scenarios in which it happens more quickly. There are three key things to watch.
First, much depends on the nature of economic growth after the pandemic. Our IHS Markit economists don't think we get back to 2019 levels of GDP until 2022 or 2023. Are we going to have a feeble economic recovery because of the economic wounds?
Look what's happened to small business, which provided 44% of private employment before Covid, and all the boarded-up shops. Eventually, will there a boom? During World War II, leading economists expected that the Great Depression would return after World War II. Instead you had strong growth because of pent-up demand.
Secondly, how has the nature of work permanently changed, in terms of where people work and how they commute.
Thirdly, often left out of the discussion, is where by far the majority of the world population lives, which is in the developing world. In a world that recovers economic growth, they will be the engine of growing demand.