Daniel Yergin has written some of the most influential books on energy, while advising companies and governments on policy and markets. He is now vice chairman at IHS Markit. His latest book, The New Map: Energy, Climate, and the Clash of Nations, looks at how the politics of oil have changed in the past two decades, with the boom in U.S. shale and the rise of China. Yergin, 74, recently sat down with Barron’s to discuss the new dynamics of energy markets. Edited excerpts follow.
Barron’s: You’ve written about the oil age, which has lasted for over 150 years. Is it over now?
The oil industry has had booms and busts for decades. Prices go up, drilling rises. Prices go down, drilling slows down. Now, U.S. oil companies are doing something new—they’re holding back on producing oil even as the price rises. They say they’re going to be more disciplined, no more “drill, baby, drill.” Do you think that holds?
I think it is holding, because we are now seeing the second shale revolution. It’s the revolution in the relationship between investors and companies. It’s no longer growth at any cost. You have to return money to investors and rebuild confidence to bring investors back into the field. I think it’s unlikely that we’re going to see irrational exuberance as we’ve seen in previous periods. I think the investor pressures are quite considerable, and the investors are not going to come back in large numbers until they’re convinced that there are really adequate returns on a consistent basis.
Do you think that the industry is investible now? The stocks are up a lot from last year, but have flatlined in the past few months.
“It won’t be an oil age—it will be an energy mix age.”
I think they’re becoming investible again. There was this exuberance a month or two ago that prices would go to $100 a barrel. We were skeptical unless there was a real crisis of some kind. It seems that prices are probably in the $60 to $80 range. What we did see before the shadow of Delta fell across the land was that demand was coming back much stronger than many people expected. Oil demand rose about seven million barrels a day from the first quarter to the third quarter of this year. The world’s going to continue to use a lot of oil for some time.
There will be some investors who want nothing to do with the industry. But for others who see that the returns are there, and they’re consistent, they will be very interested in those returns as part of their portfolios. As long as we don’t have another big virus-driven downturn, or some big crisis in U.S.-Chinese relations that shapes the world economy, these companies are going to be much more focused on paying down debt and returning money to investors than they have in the past.
You mentioned U.S.-China relations. Your book examines how much the world has changed when it comes to the politics of energy. Globalization has been falling apart in the past decade. Obviously Donald Trump was behind some of that, but it happened before him and has continued after. Does that change the dynamics in oil, and maybe even prices in the future?
I do think that oil figures very much in geopolitics, which is part of the story that I was writing. It figures in U.S.-Chinese relations in different ways. For China, its ownership claims in the South China Sea have a lot to do with the passage of oil imports. The Chinese import 75% of their oil. And they wish they were in the position the U.S. is of being self-sufficient. They worry about the U.S. Navy and that oil transport. On the other hand, China has become quite an important market for U.S. oil and gas exports, which is something that most people don’t know.
The overarching question is where U.S.-China relations go from here. As you mentioned, the change started before Trump came in. Up until about 2015, it was governed by what I call the [The World Trade Organization] consensus—that China would be a responsible stakeholder, part of the same international order. It’s really remarkable how much things have changed. [Barack] Obama’s last national security strategy talked about constructive engagement with China. And you look at what has happened since, under not only Trump but also [President Joe] Biden. Biden has the same people over there as were under Obama. Biden’s saying China is a strategic competitor, talking about great-power competition. And the Chinese see it the same way. Ultimately, the great geopolitical and economic question of the 21st century is where this U.S.-Chinese relationship really goes.
Part of Trump’s China trade deal was that the Chinese would buy a certain amount of our fossil fuels. Does that start to change? Could China say, “We’re pivoting to Russia” or some other supplier?
I think it certainly could happen, because the Chinese have shown if they have displeasure, they’ll act. No more Australian wine goes to China. They’ll cut off sales of rare-earth elements to Japan. But the downside of that for them is that we’re a really important export market for them, too. So retaliation would beget retaliation. They see importing oil and gas from the U.S. as part of a strategy of trying to manage the trade balance between the two countries so that they can continue to sell a lot of stuff to us.
You write a lot about Russia, too. Where do the Russians fit in this? How does the U.S. shale boom affect them?
“The relationship between Russia and China that was formerly based on Marx and Lenin is now based on oil and gas.”
I have an anecdote in the book about somebody asking [President] Vladimir Putin a question at the St. Petersburg Economic Forum. Well, that somebody was me. I happened to mention the word “shale.” And that’s when he started shouting at me in front of 3,000 people, which was pretty uncomfortable. How low can you get down in your seat when that happens?
I realized that he doesn’t like U.S. shale for two reasons. One, it makes us a competitor in the European gas market, which [the Russians] regard as their backyard. And secondly, he sees it as an adjunct to U.S. power, giving us some flexibility in the world that we previously didn’t have.
Putin has made Russia a global player. And his relationship with China has become very strong. The personal relationship between him and [President Xi Jinping of China] is very strong. There are some in Washington who think somehow we can peel Russia away from China. And he might want to have some flexibility. It’s good for Putin to meet with Biden. But basically, I think Russia and China see eye-to-eye on many issues—in particular their opposition to what they see as a U.S.-dominated international order.
How does oil play into that?
The relationship between Russia and China that was formerly based on Marx and Lenin is now based on oil and gas. Russia has become an important supplier to China, and with the development of liquefied natural gas, or LNG, in the north, it can be an even more important supplier. That’s a very conscious strategy for those countries to kind of hitch their wagons together from an energy point of view.
All of these new dynamics, including the U.S. shale boom, are also changing things in the Middle East.
It really struck me when there was the attack on that crucial facility in Abqaiq in Saudi Arabia in 2019. If that had happened five years earlier, you would have had oil prices spiking. This time, the market just shrugged it off. I think that the development of U.S. shale has turned out to be an enormous security cushion against a panic in the market. But at the end of the day, there is still only one world oil market. If you have a major and extended disruption, that will affect everyone. The U.S. is in a much better position than it was in 2008, but it isn’t divorced.
Does that make it less likely there will be war in the Middle East, or at least less likely that we’ll be involved?
I think there will be questions about the nature of our military commitment. How important is the relationship with the Gulf countries? And you’ve seen Saudi Arabia make a turn toward what they call a strategic relationship with Russia. [The new oil alliance] OPEC+ is really a Saudi-Russian deal.
If we are moving out of the oil age, who will hold the power in what comes next?
We’ve focused on the supply chains for oil for a long time. We’re just beginning to look at the supply chains for a net-zero carbon world, and there are a lot of complexities there.
If you’re looking for where geopolitics and energy come together in net-zero, it’s China, because China has such a dominance over the supply chains—80% of the lithium ion battery supply chains, 60% of the world’s rare earths.
China is very dominant in those supply chains, and the supply chains are relatively small compared with what you’ll need to build up. We’re going to need a lot of mining to meet these targets. We’ve been so accustomed to Big Oil. In due course, we’re going to have to be talking about the Big Shovels.
Thank you, Daniel.
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