Daniel Yergin — author, speaker, and economic researcher. (AN)
RIYADH: Daniel Yergin changes people’s lives. There are stories of how budding artists or poets read his 1991 book “The Prize” and opted instead for a hard-hat career in the oil industry, lured by “the epic quest for oil, money and power,” as the book is subtitled.
The book, which won him a Pulitzer Prize, was compared by one reviewer to the work of the classic Greek poet Homer for its “string of larger-than-life swashbucklers and statesmen, heroes and villains.”
That may be over-exuberant, but “The Prize” — a sweeping narrative of the oil industry — has shaped many of the policy agendas and debates in the energy industry ever since publication, and, along with its sequel “The Quest”, remains essential reading for anybody interested in the black stuff.
Yergin did not look especially Homeric in the lobby of the Ritz Carlton in Riyadh, right after the Future Investment Initiative (FII) finished last week. He looked more like an academic-turned-successful businessman, in-demand policy adviser and public speaker who was concerned about catching his evening flight out of Saudi Arabia.
But he had been kind enough to agree to an interview, and — despite being frequently interrupted by people who recognized the 70-year-old celebrity and wanted to shake his hand — he was willing to give up 30 minutes of time that would probably cost several thousand dollars if it were for an oil company, a think-tank or a government.
Where do you start with such a legend of the industry? The obvious subject was what had been called “the elephant in the conference center” — the debate over the initial public offering of shares in Saudi Aramco — but for several reasons he was unable to say much beyond what he had already stated on a public platform at the conference.
“The crown prince, the energy minister and the Aramco chief executive all say there will be an IPO, so you have to assume there will be an IPO,” he reiterated.
So, Aramco to one side, he talked about oil. The 2014 collapse in the price of crude and the effect it was having on Arabian Gulf economy and society was the main reason we were in Riyadh. The Saudi government responded to the resultant decline in energy revenue with a far-sighted plan — the Vision 2030 strategy — to get away from oil dependency. The FII was the “coming-out party” for that strategy.
“The 2014 collapse in oil prices was such a severe shock that it will take a long time to recover, and even this potential recovery has been made more complex by the US shale industry. That has recalibrated its finances to the $40-$50 range, so now we’re in a ‘short cycle’ in oil,” Yergin said.
He explained that this was the “new dynamic” that exists between oil companies and the world of finance, mainly private equity firms. As long as the price stays around $50 per barrel, financing shale production will be possible, even profitable.
“The financial world has a much bigger impact on the oil market than ever before. The major oil companies have to have shale in their portfolio because it is a such big part of global production. But the overall effect has been to increase volatility in the oil price,” he said.
The price, in fact, had been ticking up most of that week, and touched $60 a barrel for the first time since summer of 2015 the day after. Was that the beginning of a sustained boom in oil prices all the way back to $100 plus?
He chose his words very carefully. “I think we are seeing something like a real recovery in the oil price now. The main reason is the cuts to production that came out at the end of last year, and the recent agreement to continue with them for a further period.
“The financial markets are having a big effect, but what’s really buttressing the price is the strength of demand. World growth is getting more synchronized, more evenly spread across America, Europe and Asia. That will inevitably lead to an increase in daily demand for oil. You cannot really talk about the oil price any more just in isolation, without talking about the global economy,” he said.
Of course, finance and economics are factors behind the direction of the oil price, but the other big factor in the past has been geopolitics, especially as it has affected the world’s main oil producing region, the Middle East.
In “The Prize”, he describes oil as a “commodity intimately intertwined with national strategies and global politics and power.” Indeed, the book is as much a history of the 20th-century Middle East as it is a history of oil, with the price of crude spiking and falling in tandem with the region’s recurring political and military crises.
Yergin detects a distinct change to this historical pattern. “What has been really striking these past few years, which I think is a new phenomenon, is that the oil price has not been affected that much by geopolitics. The Middle East and the Gulf region are perhaps more volatile — Qatar, Iran, Syria, Yemen — than they have ever been, which you’d expect would increase the oil price on fear of supply failure. But it has hardly happened,” he said.
The evidence suggests he is right. The current confrontation between Iraq and Kurdistan has had only a slight upward effect on the oil price, and similar political issues in Libya and Nigeria have not really affected prices. The deep political and social problems of Venezuela, teetering on the edge of anarchy, have barely affected global crude prices.
“The basic truth, which we sometimes lose sight of, is that price matters,” he said. People will buy more oil when it is cheap, and less when it is expensive. This is true of all commodities, where he believes there is a general recovery underway, but especially oil.
In the longer term the price of oil will also be determined by the amount of investment the oil companies are putting into developing new fields, and that has been seriously affected by the fall in prices. Once again, the worlds of finance and oil interact profoundly.
“The oil industry is still cautious on spending. The upstream spend has been reduced by $2.1 trillion since the oil price started to fall, we estimate. So a big question is: When does capital expenditure recover, because this will determine the level of supply in years to come. We’ve seen some evidence of an increase in upstream spend in the US, and Aramco never really let spending fall,” he said.
The other new variable in the oil price equation is the aggravated issue of climate change and environmental concerns that has prompted big investment in new, cleaner technologies. IHS Markit, the research consultancy of which he is vice-chairman, has just produced a major piece of research called “Reinventing the Wheel” on the subject of electric cars and their potential to affect the oil price, which was much discussed at a recent gathering of business leaders at a meeting of Ceraweek (another of his business ventures) in India.
The verdict of Yergin — a critic of “peak oil” theories in the past — is that basic crude will be with us for some time to come. “I believe that demand for oil will continue to rise until the mid-2030s, but there are many variables that could affect that along the way. The demand for electric cars is being driven by governments, so it can slow down or accelerate according to the wishes of policymakers and the pressures on them.
“In India, there is a school of thought that electric cars make sense for a country which has to import most of its oil; but there is another which says just it’s just a fad, a fashion that will eventually be discarded,” he said.
Yergin is an energy analyst first and foremost, but because of the central role energy plays in global politics he is also much in demand for his thoughts on geostrategic issues. He was a member of the business council President Donald Trump disbanded in the summer after another political controversy, and he had already given some pointed (but off-the-record) opinions about Rex Tillerson, the former oil man turned US secretary of state, as well as the political motivations behind a raft of climate-change litigation in New York against big oil companies.
So he is well placed to judge the political and economic issues facing Saudi Arabia. The Kingdom is pursuing its own version of “the prize” as it seeks to get away from oil dependency. Was he coming away from the FII more confident in the ability of the crown prince to see through the big changes necessary to create a less oil-reliant economy and society?
“Diversification along the lines planned by the crown prince can be achieved, but the degree of pace and speed of implementation will determine how successful it will be. A lot of this has to do with entrepreneurialism, making it easier for young people to be entrepreneurs. That is where all the growth is these days,” he said. He noted that the market capitalization of Tesla, a 14-year-old startup, was only a few billion behind that of General Motors, the giant of the American car industry.
But he also saw it all against a long-term historical background. “The big take-away for me from FII was the that the era that began in 1979 is over. The Saudi reaction to the two big events of that year — the attack in Makkah and the Iranian revolution — was what has defined the Middle East ever since,” he said.
“Now, I believe that phase is over. It’s not often that you get to witness the passage from one era of history to another, but that is what I believe I saw from the crown prince on stage here. He made clear that we are on the cusp of an historical transition. It’s exciting,” he said.