June 20, 2016

CNAS 2016 Tenth Annual Conference: Global Changing Energy Markets and U.S. Strategic Opportunities

MR.     :  Welcome, everybody. Can I get your attention for just one minute, and I won’t keep you from eating lunch, but before we get started there are four poll questions which you can find on your app, which will test your knowledge and wisdom of this subject, and I would encourage all of you – if you want to take a minute – to answer those before we get started. Then you can have three more bites and then we will get started. Thank you.


OK, well, since you’re quiet we’ll get started. We’ll make you pay. Welcome to this session on global energy markets and U.S. strategic opportunities. It’s the longest day of the year today, which is good because we’ve got a lot to cover. And I won’t do long introductions. You can see also in your app who everybody is, but we have from my side on Dr. David Gordon, one of the authors of the report which hopefully you all have; Elizabeth Rosenberg, also an author; Edward Chow from CSIS; and not on the printed program, Derek Scissors, resident scholar at the American Enterprise Institute. So thank you all for coming. We’ll do a discussion and then we’ll open it up to questions about half way through.


So, let me start with you, Liz. Your report starts on the premise that the objective conditions, as we used to say in the good old Soviet days, have changed in very fundamental ways and that policymakers haven’t entirely caught up. Start a little bit and explain what you mean by basic conditions having changed.


ELIZABETH ROSENBERG:  Sure, thank you. So objective conditions for the energy market, of course, and the premise that we started from for this report, which I think I would characterize more as a foreign policy report, although the currency is of energy. And so what we wanted to do is talk about how conditions in the global energy market have changed, particularly in quite recent years, and how that affects U.S. policy – foreign policy, trade policy, and specifically for purposes of this report relationships – great power relationships or major competitor and (partner ?) relationships for the United States.


Our focus was on the United States, China, and Russia. So although we spent a little time laying out some of the conditions with many of the – (inaudible) – which is to say, a massive increase in energy production from the United States in particular due to a technological revolution that vastly expanded by over 80 percent the oil and 50 percent the natural gas production in the last sort of decade. It’s going back a bit in this year and it’s anticipated to do so again next year because of the price collapse, but that really revolutionizes the way people have thought about the United States as a producer country in the global energy market.


In addition to that, there’s two other major trends that I think are worth pointing out at the outset. The first is that, in fact, of course, Chinese economic growth has slowed down and the nature of the growth has changed, moving from less intensive commodity inputs and that kind of industrial development to a different kind of growth – more service oriented, more focused on domestic consumption – which of course changes China’s energy consumption profile.


And lastly, I would just point out the decisions by Saudi Arabia and OPEC more broadly to play for market share instead of defending a higher price, which has had a pretty profound impact, as of course everyone here knows, on energy prices.


And those three things in particular have changed the way many people from all sides of the picture – producer, consumer, investor, market watcher, people concerned about energy security – have thought about the market.


So that’s the premise here from the objective conditions, if you will.


MR.     :  Gotcha. I should have mentioned, there are two other co-authors. Are they here? I know Elly (sp) –


MS. ROSENBERG:  Elly is here.


MR.     :  Elly Marayama (sp).


MS. ROSENBERG:  Alex, I think, is not with us at the moment.


MR.     :  Anyway, it’s actually a lot of really interesting stuff in this paper, which I highly recommend.


So, with equal brevity, David, give us the overview of how this change in objective reality changes the policy opportunities, especially for the United States, in your view.


DAVID GORDON:  So I think basically we see in the accumulation of these changes in the energy markets a lot of opportunities for the United States. People usually talk about the United States and U.S. power in terms of constraints. It’s our view that the U.S. role in energy actually creates a lot of opportunity for the United States. Let me talk about several of them. Here are some of the main ones.


I think the first is that our relative independence and our relative autonomy now from the longstanding dependence on the Gulf gives us flexibility in relationship to Gulf producers that we didn’t have. The U.S. still has a big stake in the overall stability of the oil market, but it has a lot more flexibility now that it is no longer really dependent upon the Gulf and that there’s no major geopolitical risk to U.S. supply, be it from the Gulf or from other parts of the world. The Western Hemisphere now is the main location of U.S. sources, so that’s a big plus.


I think the second is that the U.S. as an exporter can influence the geopolitical outcomes in two key strategic regions for the United States. The first is Europe, which has long seen a high level of dependence of the European consumption, particularly gas consumption, on Russian production. And then the second is East Asia, which is the big growth area in demand now, and the rise of the U.S. as a producer both gives the U.S. a direct ability to export into that market, but also creates I think the kind of economic and fiscal space for longevity to the U.S. military presence broadly in both the Western Pacific and elsewhere.


So I think that’s the starting point for the analysis is that the U.S. has a series of opportunities coming out of this that really lie in a very different narrative than what we’ve generally thought about in terms of U.S. constraints and increasing constraints. Here we have increasing opportunities.


MR.     :  OK, we will explore those. Maybe this would be a good time to look at the poll results. Shall we? So I guess this was the first question. China will account for what percent of the world energy demand growth through the year 2030? And, in fact, there was a correct answer and most of you were smart enough to recognize that it was going to be the one that is not a multiple of five, so a plurality of you got it right – 29 percent.


OK, let’s look at the next one. In 2015, Russia was the largest producer of crude, surpassing the United States and Saudi Arabia. What’s the projected ranking of the suppliers in 2025? How did people vote?


MS. ROSENBERG:  Not a lot of votes.


MR.     :  There we go. And the correct answer was, Liz?




MR.     :  B. The correct answer is always B. That’s the other rule you need to know for CNAS conventions. (Laughter.) So the U.S. even then will be third and Saudi Arabia will still be first, and yet you let Saudi Arabia out of your report. Can I ask you why?


MS. ROSENBERG:  Yeah, it’s a good question.


MR. GORDON:  So we (didn’t leave ?) them out completely. The purpose of the report was really to talk about the impact of these changes in the energy markets on the great power relationship among Russia, China, and the U.S., so the second big sort of how the world has changed, in our view, is the reemergence over the last few years of the strategic triangle between Russia, the U.S., and China that dominated global geopolitics in the last two decades of the Cold War but hasn’t played a very large role since then.


And so we talk about Saudi Arabia a bit, but more in terms of its impact on the markets rather than on the relationship itself, but it’s a fair question.


MR.     :  Can we do the next question? Over the next decade, the Russia-China strategic relationship will deepen, weaken, or remain constant? Wow.


MR. GORDON:  One vote. (Laughter.)


MR.     :  Oh, there we go. Interesting. People still voting – changing their votes. Is this allowed?


MR.     :  It’s more people voting.


MR.     :  OK.


MR.     :  Maybe it’s the same person voting over and over.


MR.     :  (Off-mic.)


MR.     :  I see. Oh, I thought everybody could vote ahead of time. All right, so then I should say, are we done voting? But that’s bad. We have group influence on the vote then. (Laughter.) All right, well, we’ll ask Ed and Derek whether this is correct or not, but let’s do the fourth question and then move on.


Despite recent escalation of Russia-NATO tensions, Russia will avoid a direct military confrontation because it needs European customers. Agree or disagree.


OK, well, we get a sense of the room.


Let’s go back to number three and let me ask each of our two non-authors, when you look at this change in the energy market, very broadly China and Russia – are they winners? Are they losers? And is their relationship strengthened or weakened? How do you see it?


EDWARD CHOW:  Well, just to add a little bit to what Liz and David’s already said, I think one of the factual changes that hasn’t given – been given enough attention in Washington is the fact that we are no longer the world’s largest oil importer, and that China has been the last several years the world’s largest importer. It’s happened since at least the Eisenhower administration, a foundation (of U.S. ?) foreign policy that we will always be increasingly dependent on oil imports, and that has fundamentally changed.


And the country that will be increasingly dependent on oil imports is China. And Liz said that this is primarily a foreign policy report, which is true. I had the honor of being allowed to review it by Liz and David. And there’s an awful lot of loose talk in Washington about what the new shale revolution does to foreign policy. And the thing I like about their report is that this report is actually informed by energy facts rather than speculation or opinion unfounded on energy facts.


And so I think it really bears thinking about when you ask about Saudi Arabia, for example, if most of the tankers coming out of the Strait of Hormuz take a left rather than a right, what does that mean in terms of security over the common seas – you know, if that responsibility as sometimes is talked about like that in this administration – is to be shared with other countries who are more reliant on oil and gas imports than we will be, what does that imply if it works in the Gulf of Aden and the Indian Ocean? What does that imply for our foreign policy towards the South China Sea dispute?


I mean, given that the stakeholders, to use a hackneyed Washington term, is somewhat overlapped, and I don’t think we think enough about those strategic questions and how that should inform our foreign policy. So I would commend to everyone to take a close look at the report.


I think on your specific question on Russia and China, you know, as long as oil was over $100, Russia was a winner. Turned out to be a temporary winner and it turns out to be there’s still a seventh game to be played. And with 50 (dollars) or lower oil price, China appears to temporarily – and all other consuming countries – is temporarily the winner for now, which gives China some options and flexibility that it may not have seen during a time of $100 oil that they’ve had. So how that informs the U.S. – I’m sorry, the Russia-China relationship going forward would be very interesting to watch.


DEREK SCISSORS:  I agree with that. China-Russia, you have this switch where maybe China was the more powerful partner 10 years ago, probably, you know. Now there’s – it’s obvious. So Russia is the junior partner and the Russians have to maneuver accordingly. And, you know, that’s the – the question is whether the two countries can do better with China as the senior partner and Russia as the junior partner in being friends than they could when it was the other way around. My answer is probably not, but I’m not a foreign policy expert.


I think with regard to China, they’ve been doubly impacted, and Liz mentioned this. We have simultaneously an independent increase in supply at the same time as Chinese demand weakness. So the independent increase in supply has an effect on a country whose demand is chugging along and is stable. It might be growing at 1 percent. It might be contracting 1 percent. But it’s magnified when your demand is crashing compared to where it was at the same time.


So it’s been a big shock to the Chinese economy, mostly a positive shock. I would argue they’re wasting a lot of their money overseas on real estate now instead of wasting it on oil. So in that sense there’s stability, but it’s been a big positive shock to China’s economy.


It kind of fights what they want to do. They wanted to reorient away from commodities dependence, away from heavy industry, and instead they are being told by cheap prices, oh, no, no, no. Keep using tons of industry. Aluminum – it’s great. Use tons of electricity. It doesn’t matter because energy prices are cheap. So it’s been a net benefit with – you know, clearly a net benefit with a couple of twists that they’re going to have to work out.


I will say one thing about foreign policy. It’s actually about the economic conditions that I think David would agree with, but I’ll just make sure. Northeast Asia is not where I would locate demand strength. I would locate it in South and Southeast Asia, meaning the volumes are very high in China and Japan, without question, but the growth is going to be in India, possibly Indonesia, Vietnam, the Philippines. And so that’s an implication for U.S. policy as well.


If you look at the levels, Northeast Asia is going to be the king, but if you look at the growth it’s going to be South and Southeast Asia, so how is the U.S. going to trade off its foreign policy emphasis? Does it matter where the oil is going or does it matter where the oil is increasingly going?


MR.     :  And David wants to make an intervention, but just before that let me just follow up. Do you see as the biggest importer China wanting to become the guarantor of sea lane safety?


MR. SCISSORS:  That is a big, big step for them. I think you’d need – there’s no reason for them to do that now. So cut the sea lanes off. Their oil is cheap. We have oversupply. We’ll get it over land. We’re working on that with the Central Asian countries, with the Russians. We can get energy of various kinds from the Australians. So to get that jump where the Chinese are actually going to move into not under UN auspices, not wearing the naval equivalent of blue helmets – to get that jump where the Chinese are going to take the lead, you’d have to go back to a shock world. You’d have to have them scared that they were going to – that their energy security was threatened.


Fifty dollars, $80 – that’s not what’s going to do it. A hundred and eighty dollars. Some idea that they’ve been cut off and the industrial machine is at risk. That’s going to – that’s what would be required for them to play that role. At this point the incentives aren’t there. They are dependent on energy imports, without question. I agree with my fellow panelists because it’s obvious. But they’re not dependent on any supplier country in particular, which means they don’t have to worry about protecting particular supply lines.


MR.     :  David, did you want to –


MR. GORDON:  Yeah, just to – a couple of points to build on what some of the other panelists have said, I think that the slowdown in Chinese demand has had a big impact on China, but it’s had a huge impact on the world economy that – and part of it is the economic slowdown. I think a big piece of it is that this 20-year-long urban building boom that the Chinese have been going through is really coming to an end now. And I think a lot of the expectations for four years ago, six years ago, earlier in the last decade were based on assumptions that that was going to sort of continue into the future.


Not by you, Derek. (Laughter.) I agree with that. But I think that that world is now gone and the world that we’re in is actually inherently, I think, a lot more resilient and in balance in terms of energy supply. So the risks in the world economy now – in the world energy economy have really shifted from the consumer side to the producer side. And the producers are now worrying, is the stuff that we have in the ground really going to be worth money, which gives them an incentive to produce, which keeps prices down even lower.


And I think Ed made the very good point that the Chinese are feeling just that they have a lot more options now when looking at energy because I think a few years ago when we had the 100th anniversary of the outbreak of World War One, there was a lot of talk about the comparison between 2014 vis-à-vis Asia and 1914 in Europe. I think the Chinese have been a lot more worried about the comparison between then and the run-up to World War Two where American pressure on Japanese supply – what was one of the main features about what was going on in the Western Pacific. The Chinese are a lot less concerned about this. A few years ago there was all this talk about China and India coming into conflict over access to energy resources. That’s all gone.


So I do think that in general the kinds of market changes that we’ve been talking about have been broadly positive on the geopolitical side as well as on the economic side.


MR.     :  Well, let me push a little on those possibilities, and maybe I’ll ask you, Liz, because if I read the report correctly, you are saying U.S. policymakers – that there’s a lot of opportunity now for cooperation with U.S., China – for us to show the Chinese that we don’t mean them any harm and we’d like them to invest in our energy sector, and we’re not going to – we’d like to export to China and so forth, so don’t worry.


But you also say, I think, we need to maintain our defense posture and strengthen our defense posture and continue to be the one who reassures allies that we won’t let China get to the first chain of islands. And given how China is feeling about the South China Sea, what are the chances that those two thinks can coexist?


MS. ROSENBERG:  Right, this is a really good point and I think – but in fact it’s important to – this is where we want to be is thinking about a broad, variegated, bilateral relationship that has – that should not be – it would be inappropriate to think of as just one of hostility or competition or one of cooperation. And, in fact, trying to find a balance I think for people who are – this is challenging thinking for many security experts to think about one that involves some of both and, in fact, areas where there can be a lever of more cooperation and an opportunity, so leverage – an opportunity to balance what may be a very fraught and difficult conversation in other security arenas.


So as has been pointed out already, there is a differentiation between the way in which China has conducted itself in its near abroad and the littoral maritime around and then also the way in which we understand China to be thinking about maritime security provision further afield. Right, and so – and not having an interest in trying to extend power or extend maritime security into the Indian Ocean and into the Gulf. And in fact where the United States has played a much stronger role there. So the cooperation that we’re talking about here in terms of investment, trade, and also coordination around market stability discussions is not just bilateral, but also we’ve talked about this in the multilateral context, which may be a way to get around some of the difficulties of a relationship that has been quite competitive and very fraught in certain circumstances.


MR.     :  Do either of you have thoughts on whether it’s possible to have that kind of cooperation at a time of competition?


MR. CHOW:  Well, it may be possible, but both sides need to take it a lot more seriously than they have so far, I would say. I like a lot of the recommendations in the report. I would just say that in Washington, unless we put some budget dollars behind efforts to do things, it doesn’t really mean very much. We’ve got lots of policy visions and slogans and one thinks of the new Silk Road as an example where it’s really empty rhetoric and the only thing that people see are perhaps adjusting military budgets to reflect where forces need to be deployed and that sort of thing. But not much real substance on energy cooperation on either side, I would say. It’s what’s been going on. So both need to take it a lot more seriously than we have so far.


The areas of cooperation are innovation. I mean, the Chinese have for the past four or five years been studying the whole American shale gas and – (inaudible) – oil revolution and wondering how the Americans pulled it off. And they talk, again, at a very rhetorical level of knowledge, society, innovation, and so on. But trying to understand that and how to build a system that allows innovation to take place is very important.


There’s been lots of missed opportunities, I would say, on both sides. On the investment side of things there needs to be a lot more serious talk about what the real investment barriers are on both sides. And those we have a lot of formal meetings where not much gets accomplished. We just had the Strategic and Economic Dialog a week ago or so. We will have a G-20 meeting. People keep meeting, so adding another forum which the paper recommends is great, but let’s eliminate those that are not working and actually put some real human and financial resources behind doing things together.


Some of this may need to be track two or track 1.5 dialog first to have honest discussion because it’s very hard to do it at the ministerial level right away. And that kind of homework – there’s been a lot of false starts and I’ve been watching this space for a long time, but not enough substance up until now.


MR.     :  Go ahead, Derek.


MR. SCISSORS:  OK. I am going to play devil’s advocate here because I know much more about China’s economy and their international economics than I know about the American economy and international economics, and the challenge to cooperation is going to be – five years ago, the Chinese were desperate. They were overpaying for any energy asset they could buy. They were ignoring corruption while it was going on. Now all the corruption is coming home to roost. You know, we said you could be corrupt, but we changed our minds kind of a problem. And they were desperate for – as Greg mentioned, they were investing heavily in U.S. shale start-ups, some of whom now are in a lot of trouble. They were desperate for cooperation with the U.S. and all that desperation goes out the window at $45-a-barrel crude.


So it’s not that there’s a source of hostility. It’s – we would even cooperate with the United States, we were so desperate in 2011, and now we’re not desperate, so why do we need to cooperate with the U.S.? I think I share – I don’t want to put words in his mouth, but I share Greg’s point: you need something compelling here from China’s perspective to get the Chinese to cooperate. You didn’t need it five years ago. It was the market. The market was scaring them to death and they would cooperate with anyone they could cooperate with, even the Russians for god’s sake.


So now, though, it’s like, all right, do you have something interesting? Fine. But, I mean, this is not a priority the way it used to be and we have lots of other options and why should we pay particular attention to what the U.S. wants to do on energy? We’re going to need to make a compelling – from the Chinese standpoint, given the market conditions as we have them now and as we expect them to be, you’re going to need to make a compelling case to the Chinese to get them to think that this is important.


Not to be hostile. They’re not going to be hostile. They’ll be cooperative, but for this to be an important area of cooperation we’re going to need to do a lot better in engaging them.


MR. GORDON (?):  So I think we see the source of the beginnings of collaboration as being as much in the security sphere as we do in the economic, purely energy sphere. I totally agree with the – with your views, Derek, that just the fact that they’re not worried nearly as much gives them much less of an incentive to cooperate.


I think the big potential for cooperation, frankly, is on – is that China is making a very big deal of this push westward. One belt, one road and building energy and infrastructure and transportation infrastructure across what has been for hundreds and hundreds and hundreds of years some of the most unstable geography in the whole world, and that’s at a time when there are a lot of signs that Islamic extremism is moving eastward. China’s moving westward, Islamic extremism is moving eastward. Right now the Chinese are thinking about the risk from Islamic extremism much more in domestic terms with the Uighurs in western China.


But I do think that the potential as China goes westward for them to look at the United States on the security side in a little bit of a more balanced way – obviously, the South China Sea and much of the Western Pacific is a pretty zero-sum game, but going westward not necessarily so.


So our view is that none of this is going to have a big impact immediately on the South China Sea. There’s not a chance, but that over time we do think that building more of a relationship can at minimum serve as a balance and an anchor to preventing the U.S.-China relationship from becoming overwhelmed by what is much more of a zero-sum engagement in the South China Sea.


MR.     :  So let me do one more area and then invite the crowd. So Chinese politics are relatively easy to analyze compared to U.S. politics. (Laughter.) So, you know, one of the points of your report is that we’re not seizing on the strategic opportunities, which will come as a shock to anyone who watches Washington. (Laughter.)


Let me ask a little bit more specifically about what strikes me as two challenges. You say that U.S. energy policy, which you assume will and should include a lot of exports, should treat energy and climate change as two sides of the same coin. But it strikes me that you have a growing constituency in this country and within the Democratic Party that believes they’re totally inconsistent and will do everything they can to fight exports of any carbon fuel, including LNG. So how does that play out on one side?


And on the other side you have the Republican Party represented by a candidate who has expressed grave doubts about traditional alliances and the need for a U.S. presence in the Pacific at all, or a forward presence. So I’d be curious from everybody on the panel how you see some of these logical recommendations bouncing into the American political situation.


MS. ROSENBERG:  Well, I’ll leap in.


MR.     :  OK. Bravely.


MS. ROSENBERG:  And I would say – yeah – there’s a couple of key things that I think you’re – where you’re going with your question that are worth talking about, and one of them – so first in thinking about climate and whether climate and energy are two parts of the same – two sides of the same coin depends a lot on how you think about natural gas. Is this a bridge fuel? Is it an end state? Is it valuable because it will allow certain consumers, particularly in the power sector to switch to a less carbon-intensive energy input or not?


So and people are ideologically divided on this point. And Democratic primary politics, this has been a very big deal, of course. And additionally I would throw in here another big theme to consider here is the sort of protectionist or anti-trade sentiment, which has been quite popular – which is popular. And also looking in both primary contests so far and that’s a real challenge to – and our point in this paper, some of you may agree, it will be difficult for a variety of reasons for U.S. policy leaders to take advantage of or try and leverage some of the benefits of this energy revolution in the United States. And that is particularly the case if people are cool towards the prospect of export – export of crude, export of natural gas, export of hydrocarbon intensive petrochemicals, et cetera.


And in particular I think in Democratic Party politics these things come together in a really difficult way such that even while there is an opportunity to leverage, as has been done by the United States and China, importantly, toward the turn of the year in thinking about climate leadership globally and taking the opportunity to pair these two economies, these two sets of political leadership to set a new framework for international – to help set a new framework for international thinking on progress towards climate goals and really turning – being able to in this partnership cast away the challenges of advanced economy and growing economy into a new way to think about progress towards lowering carbon.


Nevertheless, there’s still a really deep problem in the Democratic Party for how to try and leverage these assets.


MR.     :  Anybody want to jump in on the Trump side?


MR. SCISSORS:  Yeah, I get – you’re from AEI; tell us about Trump. (Laughter.) I don’t know anything. I work the Hill a lot, both sides of the aisle, so I’ll talk about the Hill. I have one comment to make about Trump at the end. It’s not at all helpful, but why should that stop me? No one else stops. (Laughter.)


The one thing about the Hill is we think of this as Democratic and Republican or liberal or conservative. There is a fair amount of cross-partisan – it’ll get pushed aside, but it’s an undercurrent of the Hill feeling it’s losing authority to the executive branch. And one of the areas in which this is true – and I’ve heard it from Democrats, not just Republicans – is that there’s been too much executive fiat with regard to climate policy – that too much authorization of EPA to do this, that, and the other thing. We have court cases and so on.


Now, the interesting twist here is I think Secretary Clinton, who has a track record of working with the Congress, is at least going to try to work with the Congress on energy and climate issues, not to go shooting off in one direction or the other, which if that could work – it’s very speculative, obviously – we could get a – we’d have a chance at a more coherent U.S. policy that isn’t constantly being challenged in the courts and you sign a Paris agreement and it’ll never go through and the other side hates it and – that you could get some sort of stability in U.S. policy. It might not be at a location that people in the room want, but at least for international purposes a stable U.S. policy is an opportunity to talk to other countries.


Strangely enough, my one comment about the Trump campaign is it seems built for executive orders. (Laughter.) And so I – this is not an endorsement of anybody. I think that in an environment where I feel like the Hill does not like the executive use of power, including in energy, that having someone else make like an opposite set of executive orders, perhaps, is not actually an improvement.


So my assessment of U.S. politics would be as – you know, big shock – Trump might be destabilizing. You can quote me on that. (Laughter.) I think it could be difficult for the U.S. to approach other countries for a few years in a Trump presidency. I’m hopeful that a Clinton presidency, given her experience in the Congress, would recognize that there is some itch in the Congress about executive fiat, including in energy, and we could build a more stable U.S. policy. And I’m not endorsing that it would be a good one, but if it’s stable we can take advantage of international opportunities more easily.


MR.     :  As the leader of an editorial page that supports fracking and natural gas as a bridge fuel, I can tell you that the energy is all on the other side and it’ll be very challenging for any – I think, for Democrats in the future.


MR. GORDON (?):  I think that the energy in the Democratic Party is clearly dominated on the other side of this. On the other hand, I think the political costs to the Democrats of moving too far on this, particularly in the upper Plains, in the mountain states where they’ve actually retained political competitiveness would be huge. And I think that the Clinton administration – I mean, during the primary season they were responding overwhelmingly to the left. I think as we head into the general election system – that season, that’s going to be balanced.


But I do think that you’re right that over time this becomes a big challenge to – I mean, I think President Obama in his all-of-the-above approach to energy found a slogan that worked for him politically and that’s going to be under a lot of attack. I do think in the short term that she will try to keep that more or less in place. And she’ll also be pressed on it by her commitment to Asia and Asian allies and this will be very important to those Asian allies.


MR.     :  And, as you said, to Europe and countering Russia.


OK, there’s somebody with a microphone. Please identify yourself and ask just one question, not a speech, and keep it very brief if possible.


Q:  Robert Kleinberg (sp) from Slumberget (ph). Not a question really, but a comment. I think it’s very helpful to remember that energy does not equal oil. In China as in the United States the energy markets are bifurcated into sort of electric power and process – (inaudible) – on one hand, and that’s coal and natural gas and some nuclear, and transportation fuel on the other, and that’s oil.


So when we think about energy oil use in China, we need to be thinking about their transportation sector, not just their economy as a whole, and those could be taking diverging paths.


MR.     :  Thank you.


MR. SCISSORS (?):  Can I just respond? That’s a very good point and the interesting thing about – I don’t want to sidetrack the audience – is they can choose. The divergence between transportation and the macroeconomy, they can’t choose their macroeconomic performance because they’ve dug themselves a nice hole, but they can choose how much money to put into transport, what kind of transport system to create, so they can decide whether their oil – I mean, other factors – whether they want their oil demand to diverge from the economy.


And the reason I brought that up is we’ve seen short-term divergence because they’re creating an oil stockpile and everyone just assumes that’s going to end, and it very likely will end, but the Chinese can choose to emphasize the transport sector in such a way that their oil demand could remain strong even though their overall energy demand is flat.


Q:  Hi, Rob (Lovitz ?), Bloomberg Government. Quick question on you didn’t talk much about Venezuela and the impact of instability. Everybody said Venezuela was on the verge of falling apart. What, if anything, does that mean for the discussion you’ve had? Thanks.


MR. GORDON (?):  Well, Venezuela is certainly on the verge of unwinding. I mean, I think over time you get a new regime in Venezuela sooner rather than later – hard to believe that the status quo can hold on all that much longer. And then at that point you still have, to use a technical phrase, a shitload of assets in the ground. (Laughter.) And so I think Venezuela, which has been a story of deterioration, over the medium term shifts to something of a comeback story. And it becomes part of this greater resilience in energy supply that we’ve been talking about.


MR.     :  Thank you.


Q:  Thank you. Mark Womack, BP America. Kind of playing off the Venezuela question and taking you back to Saudi Arabia, so obviously OPEC’s influence kind of rises and falls with the oil prices, but with Saudi Arabia kind of refusing to carry the water for OPEC and no longer keeping production artificially down, do you think that OPEC’s influence will rise if oil prices rise or is this a sea change for OPEC?


MR. CHOW:  I guess I would fundamentally disagree with the question. I think it is our impression that Saudi Arabia’s or OPEC’s influence rises or falls on the oil price. The question is which is the cause and which is the effect. Hundred-dollar oil was never in the interest of a cartel because it brings in substitution, conservation, alternative supply as we have seen. So letting oil prices go out of control too high for too long was a sign to me of a loss of control on the part of OPEC rather than OPEC being successful. They rode a wave and now they live to suffer the consequences as a result.


You know, OPEC has not been a functioning cartel for quite a long time. You’re in the business. You know that better than I do. And Saudi Arabia, as Dave has suggested, is pursuing a production plan that it thinks fits with its long-term national interests, which is to preserve the value of the assets under the ground for as long as possible while in the meantime trying to diversify the economy – good luck with that – as quickly as possible.


MR. GORDON:  I think in terms of OPEC now it’s really important that in 2016 the tensions and the conflicts between Saudi Arabia and Iran came directly right inside of OPEC – that both sides – before this year, both sides tried to keep the tensions between them from directly impacting OPEC overtly – largely successfully, although they had an impact. But in 2016 both with the so-called freeze plan from Saudi Arabia that was directly directed against Iran, Iran’s overt opposition to participation in any negotiations around supply management and just the political backlash in Iran to the fact that they have not seen what they, I think unrealistically, felt would be some of the results of the Iran nuclear deal and the growing dominance of security views in Riyadh that are very, very directly geared towards weakening, if at all possible, Iranian capabilities.


I think that’s going to be part of the equation for a very long time.


MR.     :  And, Ed, you said good luck with that. What’s the basis for your skepticism?


MR. CHOW:  Well, it’s really hard to reform if you haven’t done very much for the last 50 years. And that’s a tough road to try to do it. The time to do it is when you have financial flexibility and not to wait until you have to do it, but that’s not human nature of course, for individuals as well as for countries.


So it’s a very ambitious plan. We had the crown prince here in Washington last week. At CSIS we met with some of the ministers. It’s a very ambitious plan. I give them credit for trying, but the hurdles are high.


MS. ROSENBERG:  If I could tag onto this, too. So you’re talking about quite an extensive social contract that they’ve funded for a very long time and a more activist, if you will, foreign policy involvement in the region, in Yemen, of course further afield in North Africa, often quite hopefully in coordination with allies such as the United States, and sometimes not. These are expensive endeavors and this is setting an expensive precedent, so unwinding or rolling back some of those expenditures on the social contract and maintaining some of this more expensive foreign policy spending is a tough place to be if you’re trying to actively diversify and pull back on that kind of spending.


Q:  Hi, Jodi Herman (sp) with the National Endowment for Democracy. I’m curious. I want to continue talking a little bit about Saudi Arabia following up on the deputy crown prince’s recent visit. What is the theoretical timeframe for Saudi Arabia to undertake the massive reforms that they’re proposing? Do they come along with internal political changes in the country? This is following on your comments on the social contract, right? Does the newer, younger generation have to deliver more than just economic change to the population, and what does that mean for U.S. strategic engagement with Saudi Arabia? How does it change our relationship with them going forward?


MR.     :  Who wants that one?


(Cross talk.)


MS. ROSENBERG:  (Inaudible) – his own one-on-one with the deputy crown prince.


MR. CHOW (?):  Well, it was not on the record, but I would say after the visit of the delegation last week, my impression was they’re not feeling as though human rights and free expression needs to be part of the transformation. And, you know, I’m not an expert but obviously perestroika has a lot of risks and the extent to which you try to bring in the reform element and think you can have them work with you and the extent to which you worry that they will run away without you. And then of course worrying about the conservatives on the other side.


But I also got the feeling that it’s really all about Iran in the end, and the Persian danger. I don’t know.


MR. GORDON (?):  So – (inaudible) – 2030 is in that class of reform programs that sees economic reform as a mechanism to postpone political pressures on the regime. What – how it turns out, we’ll see, but it’s definitely in that category of efforts.


I would only say that I think one of the most important sort of indicators of where we are now with Saudi Arabia in terms of political stability is the continued very optimistic responses that Saudi citizens give when asked, are you optimistic about the future? And in Egypt, in Tunisia back in 2011, these numbers – optimism about the future – these were in the teens. In Saudi Arabia they’re around 60. That’s a pretty robust number. So I don’t think we’re in for any kind of immediate social conflicts here. Indeed I think the whole scheme of putting a portion of Saudi Aramco on the market is to create the financial resilience that Ed is talking about.


Q:  Heather Warner (sp), formerly DOD, now I work in solar, so I do want to go back to the renewable question, but not from a climate change perspective because renewable as it relates to climate change is really kind of a five-year-old, out of date equivalency. The reason I say that is you’ve got, I think, about 1 percent energy consumption growth in China that was all met – in fact, doubly met by their renewable coming online. The same thing is true for the United States. We flatlined energy consumption in 2015: 73 percent of new energy generation put on in the country was renewable energy, so let’s just talk economics. Let’s not talk the political ideology piece.


And to your point of what do we do with natural gas, if natural gas is a bridge for heat and we focus – because electrification is a lot easier from renewable versus the heat side of fossil, what happens with Russia and what happens between China and the United States with the rest of energy security when energy, to your point, does not equal oil?


MR.     :  Liz, you want to take that?


MS. ROSENBERG:  So for sure, just responding to the last things you said most immediately, for Russia, which is of course an economy hugely dependent on traditional hydrocarbon and export, it can only be challenging economic news for the more aggressive growth in alternative energies to these traditional hydrocarbons and efficiency, of course. So that’s tricky and it’s also – in looking at a recent history of relatively poor performance on economic diversification for Russia and a serious overhang of misallocated domestic resources, which I’ll let you talk more about – that bodes poorly.


But actually interestingly for the U.S.-China relationship, this is an area where there’s great potential for interesting collaboration. There’s capital on the sidelines interested in opportunities. There’s a great mutual interest in technological development and deployment, together, mutually, et cetera. And a lot of shared interest in trying to – if the market conditions apply, particularly so in the United States, figuring out how to deepen this penetration of this sector of the economy. It’s a real win-win for many stakeholders – sorry to use that term – in both of those economies. So I think that’s another good area for U.S.-China collaboration and it’s one that has received quite a lot of attention. Well, some attention. We should speak in relative terms – between these two assets of political leadership, but certainly that could be much more intensive and at a much higher level.


MR. SCISSORS (?):  I just – I always complain about how badly the Chinese economy allocates resources and then somebody will come up and say, Russia. (Laughter.) Yeah, you’re going to have to be careful of fads in China, both in terms of the – looking at Chinese statistics and wow, we brought all this capacity online, which no one is using. Capacity was brought online and was invested in when energy demand was soaring. It’s not soaring and now, you know, kind of we don’t want it. It’s in the wrong place. The incentives have been reduced in some cases, so we’re not going to bother anymore.


You also have to be careful of fads – and I’m not arguing against U.S.-China energy cooperation, I’m warning against being misled – of the fads affecting U.S.-China energy. You get these – the Chinese decide that energy innovation is located here and it goes in the five-year plan and the money goes here and they create innovation bubbles. They did it with solar panels; they’ll do it again with other things. And then they all want to focus on that because that’s what the government’s talking about and that should be where the U.S. and China should cooperate, and then the bubble pops and we don’t talk about that anymore.


So it’s much more challenging to figure out where Chinese energy demand is going than it might appear by sort of China’s energy allocation, which (as she said ?) might appear on flat demand. They have a lot of options they didn’t have before. Before it was like everything – everything – we don’t want to use more coal and we’re still using more coal because we can’t keep up. And now there are a lot of choices involved. There’s a lot more internal bickering within China. The oil companies are very, very powerful actors that submit a lot of tax revenue – will not be that easy to shunt them aside. The state grid is even more powerful and they want certain things and they don’t want other things.


And so, you know, what I’d be careful about is, OK, the macro picture looks like we could cooperate, and I don’t disagree with that, but watch out for sort of what the Chinese say they’re doing is like this is the new innovation. That’s not how U.S. policy should be guided. U.S. policy should go back to more fundamentals. You guys are going to bounce around from place to place. Where can we cooperate that isn’t subject to the latest frenzy in Beijing?


MR. CHOW:  I’m sure it will shock Washington that special interest groups in China has an influence on national policy. (Laughter.) But I think, to your point, it is about coal use and to what extent there are Chinese who argue that maybe we’ve seen peak coal demand in China and what the substitutes are, whether that’s renewable or natural gas, which is the subject that you brought up.


I think the unpredictability of natural gas demand in China has more to do with domestic economic policies than anything else. I mean, on paper there are very ambitious plans and the current five-year program to move from 6 percent of primary energy to 10 percent of primary energy, but how will pricing liberalization take place and be implemented? What would the impact be on domestic gas demand, domestic gas production as well? If they actually introduce nationwide carbon-trading, what would the effect be on gas?


On your specific question I think you mentioned Russia. I think the pricing regime – (inaudible) – way in means all those projects are going to be delayed. I mean, it’s just a lot harder to do power Siberia at $50 oil than at $100 oil, which is why you see Russia refocusing on the European gas market. This is why the recent focus on (North stream ?) two, for example, is that although it may be in both countries’ long-term interest to have a strategic energy cooperation and more trade in energy, in the short to medium term it’s going to be economically very difficult. That doesn’t mean that they’ll give up on the Power Siberia or the pipeline projects. It’s just going to be pushed back in time. And this is what I’m hearing from both Moscow and Beijing.


MR.     :  Let me follow up on that because the report – one of the themes of the report is that Russia’s overtures to China have met with some disappointment and that therefore it is still putting a lot of attention on Europe. And not entirely unsuccessful there, despite Crimea, despite sanctions, despite everything else.


So talk a little bit and bring Brexit in if it fits. What are Russia’s opportunities still in Europe and how – because it’s dangerous to ignore Putin for too long, I thought we should at least get one question there.


MR. GORDON (?):  Yeah, so I do think that the timing of these market changes were very, very negative for Putin’s hopes that you could have this escalating energy-based strategic relationship between Russia and China. And Putin and Xi still play as if that’s happening, but it’s really not happening very much anymore, for all of the reasons that Ed mentioned.


So Russia has focused back on Europe. That’s where their main interests are. I think that Russia – I mean, they have a hard time getting – pushing deals through. Putin’s very good at playing tactical sort of one-move, two-move chess. It’s hard for him to deliver the goods, so last year he made, I think, real progress with convincing Prime Minister Renzi, a lot of politicians in both Greece and in Spain, that sanctions make no sense and that Russia can be a constructive force in Syria. Then he goes into Syria and he does all this stuff not so constructive from the Italian point of view and from the Spanish and Greek point of view. So he said he’s having a hard time closing these deals.


I mean, I do think that Russia sort of favors almost anything that weakens the coherence of Europe and leads to a more decentralization of decision-making down to the nation-state level. It’s the same as China. China doesn’t want to deal with ASEAN. It wants to deal with Southeast Asian countries. Putin doesn’t want to deal with the EU. It wants to deal with individual European countries.


You know, my own view is that Brexit isn’t going to happen, but who knows.


MS. ROSENBERG:  We’ll find out this week.


MR.     :  Time for a couple more questions. Yeah?


Q:  Hi, Jeremy Hill from (Old Blackheath ?) companies. Can you talk a little bit about shale gas in China? Tight formations, how long to market, what’s the critical path, and generally just how has it changed the dynamic with Russia?


MR. SCISSORS:  So, start from the basics. The basics are where did shale gas come from here? Predication was you could actually buy land whenever you want it on a commercial basis. Can’t do that in China. Shale gas was started by what? It was started by small firms wildcatting. Don’t have those in China. Can’t explore. Exploration is controlled entirely by the state. So they don’t have the market conditions for it.


It’s not that they don’t have any sort of market, but they don’t have – they have a very distorted market at home, as Ed mentioned before, and they don’t have the market conditions anything like what brought about shale gas activity here. They tried very explicitly to just say, let’s just transfer the technology. And their oil companies are not particularly good on assimilating technology. It was going to take a while. And then the bottom dropped out on the price.


So there is still an energy security. Wouldn’t it be great if we could tap all these notional shale reserves and then we wouldn’t need anyone and that would be so wonderful and it would be like, you know, our supposed grain security, which they don’t actually have but they like to talk about. But the air has gone out of the balloon. It was a big focus of activity. They really wanted to just copy it and then they realized they couldn’t copy it, so what can we do to get American technology and American know-how to create our own version of a shale revolution?


And now there’s a lot of talk, but there’s a lot less action from the oil companies. You know, a group that I’ve been talking to for 20 years and they’re just less interested because of course they’re less interested. I don’t mean there’s nothing going on. I just mean we had peak China shale frenzy a couple years ago and we don’t have it now. (Laughter.)


And they were having problems at peak frenzy because they don’t have the kind of conditions necessary to gear up shale production to an American level. They could be the second biggest shale gas producer in the world, but they don’t have the conditions to get to where they want to go, which is where we got, which is away from Middle Eastern oil and in their case away from the Russians.


MR.     :  But they have the actual shale oil?


MR. CHOW:  The geologic conditions are very different from North American geologic conditions.


MR. SCISSORS:  Right. I mean, we have this problem with the USGS, U.S. Geological Service, treating reserves as reserves as reserves. There’s currently commercial reserves. No. There’s on the other end of the spectrum in theory there is stuff there, yes. They’re closer to the in theory than they are to the commercially available. So you could get a very large China shale figure, but it is so far from viability that it’s not meaningless, but it’s close to meaningless at this point.


MR. CHOW:  I think that the interesting question, to take the second part of your question, is what happens if the domestic production don’t increase as fast as the Chinese have projected it would increase? What would they do then? Would they use less natural gas? That’s an option. Would they import that natural gas, and if they do import that natural gas would it be pipeline gas or LNG?


So there are a number of conditions into the future that we don’t know the precise answers yet. That doesn’t mean that they won’t try to do shale gas with Chinese characteristics. It may fail, but that doesn’t mean they won’t try.


Q:  What’s your prognosis for a grand, integrated North American energy strategy given the recent change with the Trudeau government and Mexico steaming along and not getting any prices they want in the Gulf and the U.S. moves going forward. What do you see as the North American strategy, or is there one or is it even conceivable?


MR. GORDON:  Yeah, so I do think that under Hillary Clinton there’s likely to be a resurgence in interest in a North American strategy. Obviously if you have Trump he’s not going to be interested in that. He’s going to build a wall. But I think –


MR. SCISSORS:  It might have gas ports. You know, like little valves. (Laughter.)


MR. GORDON:  But I do think that you could – if Clinton wins you could see I think a dynamic towards a sort of North American approach to energy, particularly in the Pacific.


MR.     :  What do you do with Keystone then?


MS. ROSENBERG:  Nothing.


MR. GORDON:  I don’t think the Canadians expect it anymore. I don’t think they’re –


MR.     :  OK, last question.


Q:  Thank you. Chris Bidwell (ph) from Federation of American Scientists. Thank you all for great presentations. The one energy source we didn’t talk a lot about in this discussion was nuclear energy and I noted that China is tripling down or planning to triple down, at least according to the latest five-year plan, and we’ve had some talk about those five-year plans. But how does that affect the calculus with regards to the other energy sources? Is that going to be a major player in hedging China’s risk of lack of resources? Thank you.


MR. SCISSORS:  So I’ll just talk about the China part. Extremely aggressive and you know they’re serious because the aggression has spread overseas already. They’re trying to build nuclear plants everywhere they can. They’ll take – you can have the Toshiba-Westinghouse technology, we’ll just build it for you. But think about our future technology. They’re definitely looking long term in nuclear. And so I take that seriously.


Now, of course, the long term means you can screw up rather dramatically. They did it in oil. Now, the one thing is, and everyone in this room is aware of it, you have to look long term. It’s going to take a long time for nuclear to displace meaningfully sort of other major sources of energy. It can displace other marginal sources of energy, but you’re talking about – when the Chinese talk about gas, gas has been mentioned, you question whether they’re going to hit their gas targets. Their nuclear targets are much farther out and they’re smaller.


So even with this really aggressive push, relying on a technology which is not yet proven – for the extent of it they’ll use some of foreign technology for the first part. It’s hard to talk about that’s what is going to matter for coal or their gas mix or oil. I think they want it to matter and I think it could matter 15 years from now. Between now and then I think it’s still marginal despite the fact that I totally agree with you that they are making a huge effort.


MR. CHOW:  The one thing about nuclear is that you need a scale to do it internationally, which is why everyone is going after all the international markets whether you’re talking about the French, the Russians, and anyone else. And when you have a growing home market, that gives you tremendous comparative advantage that no one else has.


MR. GORDON:  I think the attractiveness of nuclear globally is tied to the perception of risk about other sources. I mean, my view is that as long as the risk of other sources remains on a declining trajectory it gets very, very, very hard for nuclear to really make a breakthrough.


China’s going to build, for sure, but –


MR.     :  Well, we’ll come back in 15 years and see how Derek did. We’ll come back in five and see how you did on coal.


MR. CHOW:  The other thing about China that we haven’t mentioned, which is a big factor particularly in Chinese politics, is the environmental impact of any forms of energy and that ties in directly with the Communist Party’s political legitimacy. So I think when we talk about things like nuclear, you’ve got to keep that in mind as well.


Now, that lack of legitimacy also caused them problem with siting and local issues at the same time, but the environmental impact of energy demand growth is a very important factor in Chinese policymaking.


MR.     :  Thank you all for the great questions. Thank our panel for great presentations. (Applause.)


End Transcript