Ronald
Oligney, Ph.D.
Author
"The
Color of Oil: The History, The Money and the
Politics of the World's
Biggest Business"
Today's
Topic: Oil in Relation to the September 11th Terrorist Attacks
Editor's
Note: We have edited the interview in this transcription for clarity
and readability.
The original real audio interview
may be heard on our Ask The
Expert page.
JIM: Joining me on the program today is Professor Ron Oligney. He is an adjunct professor at the University of Houston. He co-authored the book The Color of Oil: The History, The Money and the Politics of the World’s Biggest Business. His technical competence in the area makes him one of the most prominent voices in the current U. S. energy scene. He performs technical, R&D and management consulting services for several Fortune 500 companies, and is a close energy advisor to various parties in Washington. He has written for numerous papers and predicted the rise in oil several years ago. He also contributes commentary for major TV networks such as CNN, MSNBC, Bloomberg, Reuters and National Public Radio. Professor, welcome to the program.
RON: Thank you for having me.
JIM: We’ve seen these horrific acts of terrorism committed against the United States and, professor, there were a couple of things that struck me in terms of what the U.S. response will be. A lot will depend if we find the ultimate perpetrator like Osama bin Laden and his terrorist cell group, or if it involves a nation state. The response to either one, obviously, has different implications for the oil markets. I wonder if you might comment on how Tuesday’s attack has changed the outlook for oil and gas and what might happen in the future.
RON: Well, certainly there has been a little bit of focus in the last couple of days on gasoline prices and some of those spikes. That’s a completely ephemeral non-issue. At the same time there are some real issues. In fact, I think the world will change quite a lot around this issue as it pertains to oil and gas. In our book we talk about, in Chapter Red, the connection that’s always been there between oil and war, and with the little twist of terrorism, this time is really not much different. The real driving thing, the thing that when we get to the point of striking back, which seems to be a tremendous inevitability is to think about how that plays in the world. But before we do that, before we take any strike back at anyone, we certainly have to consider the security of our oil sources ahead of time. If you look back at the last 35 years, at the employment history in this country, all of the negative job growth periods, for example, which would directly translate to our economic prowess, are interpretable in terms of oil supply disruption. The biggest trigger for negative economic is oil supply disruption. With our dependence on energy, the fact that we’re so energy efficient, we burn so much energy and so efficiently, is that a little bit of missing energy, oil, natural gas, destroys a lot of economic activity. So, we have to be very careful about securing a lot of the potential targets in people’s minds, which are in fact major oil exporting countries.
JIM: You know professor, one of the things that struck me about this is that the inevitable military response will be centered somewhere around the Middle East. And the fact is we import so much of our oil from that region. Up until Tuesday, the debate about having some kind of energy policy, whether we open up our oil reserves in Alaska, the 2000 acre of mud, mosquito infested tundra, these were major debates in Washington. If you talk about the landscape of issues, up until two weeks ago, items such as having a missile defense system to protect American cities, the thought was we were not vulnerable. So it seems what we’re going to do militarily, how we pursue it, and also the whole energy debate has got to change as a result of what happened this week.
RON: Certainly, that’s been kind of the underlying thesis of our energy policy is that we live in a basically benign, inherently stable, sort of world. The premise for importing 50% of your energy needs is that, in fact, the world is a stable place. As soon as you take away that fallacy, as soon as we had the wake-up call, which was very painful on Tuesday, then it does change the fundamental elements in the conversation. Certainly, geographically, there is a big mismatch between where the oil, where the energy is at, and the countries that consume the energy. The most identifiable would be Japan, but certainly the United States sits very prominently in that discussion, being the largest consumer of energy far and away in the world.
JIM: The thing that we have to worry about, and I can’t help but believe they’re thinking about this in terms of formulating any kind of response, whether it’s a terrorist cell group like Osama bin Laden, or it’s a nation such as Iran or Iraq that is involved, or even Pakistan, it has obvious implications in terms of our response. How do we respond to a situation if we were to go to war against Iraq, Iran or another major oil-producing state? It seems there’s three issues. Number one, it disrupts the supply of oil. Number two; it drives the price of oil up, which hurts our economy even more. Number three; we do have good relations with several oil-producing states, such as Saudi Arabia and Kuwait.
RON: If you travel around the Middle East for awhile, one of the notions that we have in this country becomes further and further misplaced. We have the idea, and you hear some of our state leaders talking about the moderate Arab Nations and so on. Really, it would be my observation that there is no such thing as a moderate Arab or Muslim State. With Saudi Arabia, we look at the Saudis, for example, as sort of moderate, mainly because they side with us when they’re militarily under attack and we buy oil from them and they buy weapons from us. But really you’re talking about a country where displaying a Christmas tree is a crime and where the police can brutally whip a woman in public for showing her arms. To consider these moderate nations is a little bit of a fanciful idea. In fact, I would say Iraq and Libya, for example, are considerably more moderate than Saudi Arabia. When you start recognizing some of the very intrinsic traits of some of the countries in this region, it’s going to be very difficult to go in there and selectively strike anywhere without creating tremendous acrimony through the entire region. Even when I traveled throughout the Middle East during the Gulf War period, the sympathy for Saddam Hussein was extraordinary. Even at that time when people would say “O.K., fair enough, you should be able to whack them if you want, but really aren’t you overdoing it?” That was sort of the sentiment that I got as I traveled around the Middle East in that time period. There’s a lot bigger fight we’re picking when we pick a fight with the Muslim world than I think that most people recognize.
JIM: That’s what struck me out of all of this. Even if we would include, let’s say, rather than use the term moderate, let’s say the more friendly disposed country such as Saudi Arabia, that if we go to war or retaliate in the region, we raise the price of oil. This becomes harmful to our economy because we import so much of it. So it seems to me, from a military strategy and a long-term security strategy, we have got to be securing, which was originally the idea behind the strategic petroleum reserves, to have ample supplies in the case of an emergency. It seems to me that we ought to be doing all that we can to make sure that we have ample supplies. Drilling, alternative sources of fuel, and alternative sources of energy should be developed and done so expeditiously so that we are not held to blackmail to a group of five nations that control the oil in the Middle East.
RON: Well this is certainly the simple lesson of history. Those without access to energy ultimately lose the war. That’s something we just have to make very prominent in our decision making. Something that works for us in this conversation, something that we’ve advocated, something that fits really all of the economic drivers in this country is the shift in the economy’s basic fuel from oil to natural gas. Really, even the disruption we had in supplies in mid-year 2000 was a natural gas problem, not an oil problem. In fact, if we make that transition to natural gas, that helps us environmentally. It certainly tremendously diversifies the sources of oil that we have in the world. The OPEC nations today are not the largest purveyors of natural gas. Maybe getting natural gas from Russia might be also ominous at some point in the future, but it does diversify the fuel supply and that’s a good thing. But, at the moment, the real bottle neck there, and something that relates directly to the energy policy debate we’re having in Washington, is natural gas infrastructure. That was the problem in California. It was not so much the bulk supply and demand but the fact that they didn’t have the infrastructure to get the natural gas into the market there. So that’s very prominent as well in the debate. The Alaska natural gas pipeline ideas that are out there, a lot of people working on L&G receiving terminals or the deep water element of the energy bill, which could be a major source of new natural gas. So these are some of the things that might be forward looking. Everything is a decade in the future, but we have to be planning and thinking this way, even as we’re trying to address very pragmatic, short term problems like we have all over the TV today and this week.
JIM: Does this give impetus to the President through Executive Orders? For example, we do know that we’re working on things such as clean coal technology. The United States has vast amounts of coal that we could be using. Certainly most of our utilities burn coal. So if the utilities burn coal, that’s another alternative source of energy. But don’t you think, after what happened Tuesday, that there have been two wake-up calls? Not only militarily, but also our own vulnerability? These are the kind of things we’ve watched since September 2001. Suicide bombings have taken place in neighborhoods and shopping centers in Israel. These kind of things always occurred outside the U.S. Now, it has been brought home to U.S. soil. Our vulnerability to such an unstable region, the Middle East, seems exposed.
RON: It will be interesting go see. With the energy debate, you know the House passed an omnibus energy bill just before the summer break and the Senate was to take it up, in fact this week, in earnest. I was on a plane going to Washington on Tuesday morning and we were halfway between Houston and Washington and the plane was turned around and sent back to Houston with no more words than “We’re going back to Houston”. So I got on the phone and talked to the folks in Washington and told them that I wasn’t going to make my meeting and they explained to me what was going on. I was the only one on the plane that knew what was going on until we landed, I think, except for the crew. Anyway, that was supposed to be taken up this week and now that will be deferred a little bit. Certainly you’re going to see this issue very prominent in the debate when it is resumed, probably next week in the Senate committees and then on the full Senate floor probably the week after that. You’ll see that argument made, you’ll see people claiming that the government should be building pipelines, building infrastructure and so on. But I don’t think that this is going to, given the long-term nature of any of the discussions, it probably won’t have a tremendous amount of traction. I think that the shift toward natural gas and the big natural gas supply will be a mainstay of the program. The clean coal and the nuclear initiatives that the President is pushing will figure prominently. I don’t necessarily agree that there’s a right thing to push. If I was to paint for you the broad implications, I think I might end up belittling dramatically nuclear and coal. I guess you could have me expound on that if you care to, but this certainly will be a lot of the discussion. I think the short-term reality is that physically we’re going to have to secure our oil supplies. That means, I guess I’ll let you interpret as you like, but that means taking over Saudi Arabia before we do anything else, that might be what the reality of the situation is.
JIM: Well, I’ve heard that same sentiment echoed in the British Parliament recently by a gentleman by the name of Campbell, one of the foremost geologists who recommended that very same thing. If we are going to begin any kind of attack, as you so aptly pointed out in your Red chapter in The Color of Oil, we need to look at oil supply. Let’s take a look at WWI. Before the war started, Churchill, then Lord of the Admiralty, recognized that diesel fuel-powered ships were much more efficient and faster than the coal-powered ships. Churchill was very much concerned about gaining access to oil in the Middle East, which the Brits did during that war. We see this even in the carrying through of the execution of WWII. Why don’t you tell the story? Many people have seen the recent movie, “Enemy at the Gate,” which was about the battle over Stalingrad. In reality, the Germans were pushing for the Baku Oil Region.
RON: They just got stuck in between.
JIM: I thought your story was just amazing. I wonder if you’d just share it because it really was a fascinating story. Here we had a gentleman that was in charge of the oil industry of Russia. Why don’t you tell them what Stalin told him?
RON: Baibakov. This is a gentleman that my co-author, Michael, interviewed. He recounts a little bit of a personal tale in the front of that. Basically, the Russians recognized that Hitler’s main surge was after oil. In fact, Hitler went with his massive assault to St. Petersburg and he went to Moscow, but certainly, by far the largest offensive was headed toward Bakku. They got stuck in Stalingrad on the way. That’s where he was headed, to the oil field. And Stalin, recognizing this was coming, called in this head of his oil industry, a gentleman by the name of Baibakov, and told him that your mission is to go from here to Bakku and destroy the oil fields. He said if the Germans get even one ton of oil, you will not return. On the other hand, if you destroy the oil field and the Germans never arrive, and you’ve destroyed our oil fields for nothing, you also will not return. So Baibakov’s words, very bluntly as he relayed this story to Michael, Baibakov said, you leave me no choice. And so with that, he left. But, of course, he had a very well executed plan. They had begun destroying the oil fields as the Germans were nearing Bakku, preserving the best wells for last. When they didn’t make it there, it was considered a very monumental victory that Baibakov accomplished. He then became the Commissar, the head oilman in Russia for the next 60 years. He ended up being a 90 year-old man and still was in the position. So, he’s very much a folk hero for his performance in the oil fields in Russia.
JIM: And that’s the thing I think most people don’t understand. It is the key of oil to most industrialized societies. Not only that -- we will go to war for it as in WWI, WWII, and the Gulf War. Those who have had access to energy were the victors of those wars. I want to talk about an area that you’re very familiar with. Let’s discuss the Caspian Sea, which is probably either the second or third largest source of oil and there’s already conflict in that region. The Russians have militarized it. They’ve got ships in the region. Recently a British petroleum research ship was fired upon or turned away by the Iranians. Since it is a land-locked sea, that oil has to transfer or be transferred to ports through pipelines that go through hostile territory. Don’t the Russians in that region, and the countries bordering that region, don’t they have conflicts there that make that an unstable source?
RON: Yes, I’m fond of saying that the Caspian oil is great oil, wrong country. It’s really difficult to move around where you there is no rule of law, nor basic operating environment in which to even develop an oil field. They’ve proved through many hundreds and hundreds of millions of dollars of investment that there are difficulties over there. Certainly that’s a very rich place in resources and something that doesn’t appear will be consequential for a fairly extended period of time just because of the whole geo-political mess. The geography of the situation is always interesting. They have a lot of political and legal instability there that causes a lot of cultural problems, which of course date back very, very far. But, even in the Middle East, the geography is again very interesting. When you see the percentage of the world’s oil exports that go through a very narrow hundreds of miles patch of the earth’s surface, it makes it all much less stable than people might like to recognize. This is not over. We’ve not fought our last war over oil yet, that’s obvious.
JIM: What are your short and long-term thoughts for oil? We’ve seen oil prices remain fairly high. Oil has traded within 26 to 28 dollars. It’s pretty much remained there. We had a spike in natural gas prices last winter and now natural gas prices have pulled back. But the thing that strikes me, professor, is they’re talking about a little bit excess supply of inventory. There really isn’t that much excess when you consider the amount of expenditure over the last three years, the amount of drilling rigs, the amount of wells that have been drilled. If that’s all we can produce with almost a three fold-five fold increase in spending, that says something.
RON: The economists, for several years now, have liked to talk about oil as something that will be cheap forever. This is really what motivated a lot of our public assault on the subject and it is just nonsense associated with it. We get a 2% surplus and that drives the price of the commodity down and makes everybody feel very comfortable that we’re awash in oil. The reality of the situation is quite different. We did have this spike now for 6 months in record numbers of drilling rigs in the continental U.S., drilling for gas, and yet the natural gas supply response was less than 2%, maybe 1½%. So, basically, we’ve hit the peak. We’ve hit about the best that we can do. When you look at oil and natural gas combined we produce and consume about 120 million barrels a day. So one day goes by that’s another 120 million barrels and that happens day in and day out. Now, that looks to me like close to a limit of what we can ever produce. We’re struggling, actually, as an industry, year by year, to maintain that 120 million.
Now this assumes that a billion-and-a-half Chinese and a billion people in India and countries like this will remain at their very low level of usage -- not even having things like refrigerators or motorcycles, never mind a car. We presume that they’re not going to start consuming an amount of energy, per capita, anywhere close to what we do. If they did immediately, with just a small step toward us from China or India, for example, we would suddenly need 200 million barrels a day. There is no way. It’s absolutely impossible. This brings us to the conclusion that either (a) we’re going to maintain a two-tier world forever, let’s hope the Chinese stay in their place, for example, which I wouldn’t espouse that rather crass statement, or (b) we’re going to be in a stifling competition for energy supplies with the likes of China. This is not a very bright picture of the future and causes you to very immediately be thinking outside the box what the solutions are. We actually think the very prominent solution is, in fact, natural gas. This is a resource which we have a great deal of in the world. Until recently it was a waste product. It can go a long way to answering that question, but there also has to be a whole next generation of research. If that’s a 20 to 30 to 50 year solution, in 50 years we’re going to have to have dramatically different solutions. That requires foresight and spending and a research endeavor which is not going on today anywhere in the world. That’s a lot of what we promote for the 50-year solutions. In the meantime, we can deal with natural gas. But in the long-term, we’re going to have to have dramatically different solutions that no one’s really thought of yet.
JIM: Professor, isn’t one of the problems with dealing with natural gas, and I know a lot of the companies are screaming to gain access to some of this valuable land, where these reserves exist and have been restricted? I know President Clinton, I think in his last year of office, placed a large amount of land and made it inaccessible.
RON: Certainly that’s the case. The coast of California is off-limits. The Atlantic side of the country is off-limits. Even the eastern part of the Gulf of Mexico is off-limits. Also, the Great Lakes, Alaska, or Anwar at least, are off-limits. There’s the political reality, as those areas remain quite a ways off-limits. So we have spent a lot of energy looking at how the situation is solved within what’s accessible. Deep water Gulf of Mexico has massive reserves, bigger than Alaska actually, that with a certain research endeavor, we can get to it in the next 5 to 7 years. 10 years on the outside. There are massive resources there. That’s something that we should be pursuing and work on sort of day-by-day.
The Alaska natural gas, and particularly the Canadian Arctic, which again is not connected up with the system at the moment, these both have tremendous potential for natural gas, but they are not even enough. There’s still a swing capacity, a gap that’s not filled, even with some of those big things, and this is why we have spent a lot of energy promoting the idea of liquid natural gas, which is a discussion of how to import gas. We’re going to have that swing capacity. Natural gas, of course, is much more difficult to store and to ship than oil. So if you run out, you don’t just have a tank of it sitting around. So we really do need to have the facility to import swing capacity, whether that’s swing capacity for several years or swing capacity even day by day. We need to have that utility. There is the transition to this new energy base which is not going to be trouble free, but I think it is probably far and away the most cost-effective. It’s far and away the most environmentally acceptable. This is not a bad picture, but it’s something we’re not doing. We’re actually, at the moment, spending a lot of energy discussing coal and nuclear, which are really last year’s solutions, yesteryear’s solutions and they come at a tremendous premium of cost and a considerable premium in environmental detraction, if you will. So, there’s a lot of confused thinking at the moment. These just have to be broken apart. We’re working on that.
JIM: Professor, why haven’t the environmentalists then joined in this debate in supporting this, if we know that natural gas is very clean and environmentally friendly? Why are they blocking access to it?
RON: Well, you know, the environmental movement. I feel I could state avidly that I’m an environmentalist, no doubt about that. I’ve got an environmental company in Australia that employs 60 folks in 5 different cities. I am an environmentalist, but when environmentalism takes on sort of the religious fervor, when facts no more matter, when you can just say whatever you want without having to address society’s needs, then it gets to be little different than what I would call environmentalism. It gets to be environmental zealotry. That group, which really is in the fringes but controls the environmental debate, in fact talks very positively about natural gas and they talk about real solutions. But when you try to implement these real solutions they, in the fine print if you will, are out there blocking us every single day. So, the fact that they don’t have to provide real solutions is, I guess, their luxury. There is an inconsistency; I mean you’re calling it straight. There is an inconsistency in the way they behave and I would like to press them to own up to that.
JIM: Looking at the short and the long-term, in your book you wrote that if one were looking at one area to invest in over the next decade to create wealth, energy would be one of those areas. Do you still feel as strongly as you did when you wrote the book?
RON: For sure. With the clear recognition that with the downturn in the Stock Market, energy companies will be punished as badly as anyone else, and maybe worse in a lot of cases. I am personally investing at the moment in a lot of energy issues. I believe it’s ridiculous how low some of those are trading and they’re going to make a lot of money over the next years. It’s certainly a growth business when you look forward. The weak players have largely fallen out. The P/E ratios are trading ridiculously low, the stock valuations compared to cash generation seem to discount the future value of the stocks, when in fact, they’re going to be going up, not down. So I feel like there’s very solid base for investment there. Certainly that’s where I’m putting my money.
JIM: The other thing that strikes me about the industry, if you take a look at the majors, the majors are sitting on 40 billion dollars of cash right now. With multiples this low and price-to-cash flow ratios this low; we’ve certainly seen a series of acquisitions in the natural gas area. I would not be surprised, I don’t know if you would agree with me, that some of the big guys, in trying to replace their reserves, have got to be looking at how cheap these stocks are selling. We’re bound to see more takeovers.
RON: That’s really inevitable. Of course, that becomes a self-fulfilling prophecy, as you are no longer competing with a long tail of companies that are out there eroding your market value by producing pots of reserves all over the place. It has an effect of lessening the activity and therefore decreasing the supply and therefore increasing the price. So, in some ways, that’s why these majors are really in no panic whatsoever to invest and even to build a pipeline from Alaska. You can tell Exxon this is urgent, you need to build this pipeline, but why would they respond to that. Less gas means higher price. They’ll wait until they can make a profit; it’s not a real problem for them.
JIM: And finally professor, I want to recommend “The Color of Oil” to anybody listening to this show if they want to gain a real perspective on oil, it’s impact on the economy, from the economy to the political side. By the way, how do you pronounce your partner’s name?
RON: It’s Economedes. He’s a Greek. He likes to tell everyone that he invented economics.
JIM: The Color of Oil is the name of the book. Since writing that book, is there anything that you would add to it if you were to write a chapter today.
RON: Well, it’s interesting that you pose the question. Unbeknownst to you, we’re actually working on an addendum to the book, which is going to deal with terrorism and the events of the week. We’re going to print a little addendum and we’re going to try and articulate the way the world’s about to change, given the events of this week, and I think it will change. I don’t think we will be the same in the future. I don’t think things really will get back to normal. Certainly the terrorist story, if you will, will be interwoven through that. Even if you look at the terrorist networks throughout the Middle East and the way those were financed, it’s almost all oil money. Osama bin Laden certainly made his fortune in the building boom. His father, in Saudi Arabia, and that country has no income besides oil. In fact, even Osama bin Laden is an oil story. Certainly we have overtly or unwittingly maybe the West’s need for oil has really been what’s galvanized our most implacable enemies, if you will. So we’re going to capture some of that sentiment in an addendum here in the very near future. That should be out in just a month’s time and it will be available, as the book is, over Amazon and so on.
JIM: So you will be releasing a next edition of the book?
RON: It won’t be an edition; it’ll just be an addendum. It’ll be an additional chapter, if you will, to the colors that we have. I don’t know, you can suggest me a color, should we call it gray or should we call it the sinister black. I’m not sure what we’ll call it, but we’ll add a color.
JIM: Well, when that comes out professor I want to extend an advance invitation to come back on the program and we’ll discuss it. Once again, I want to thank you for joining us and lending some insight to the importance of this most valuable resource.
RON: Again, I appreciate the invitation.
JIM: All right, professor, you have a good evening. The name of book is The Color of Oil, written by Michael Economedes and my special guest today, Professor Ronald Oligney.
An additional note from Jim --
Something to think about... a refinery takes 10 years to come on line. It takes 4 years to draft the plans and 6 years to actually build the structure. What would happen to oil prices if the next terrorist attack destroyed even one refinery?