The Corona Oil Shock

[MUSIC PLAYING] MARK BLYTH: My name is Mark Blyth I am the director of the Rhodes Institute for International Economics and Finance at the Watson Institute of Brown University I recently did one of these web chats with Ed Steinfeld who is the director of the Watson Institute talking about the coronavirus and sort of the effects on the economy and those sorts of things We decided that worked quite well so let’s talk about something else, which has been in the news and also makes little sense and has upended all of our expectations, and that’s oil And luckily, we have on faculty, Professor Jeff Colgan, who is an international relations scholar of some renown who also happens to be one of the few people who really, really understands the sector and the geopolitics therein So looking forward to having a good conversation about that So Jeff, let’s get started, shall we? You’re ready? All right Let’s get started with this I posted something on Twitter just the other day, which was a very short thing that said, well, that’s unusual, and that was negative oil Can you walk us through how you get to negative oil? Let’s use that as our starting point JEFF COLGAN: Yeah It’s been a crazy last couple of months for the oil markets Generally, we’ve never seen oil prices go negative before in basically a century and a half of the oil markets, but I think of this as sort of three crises at once for the oil markets There was the first phase of the coronavirus in China, which hit world oil demand very dramatically I mean, demand in China, but that ultimately means world oil demand The second phase was a spat between Saudi Arabia and Russia, or more broadly, the sort of OPEC plus group of countries that were trying to prop up the price of oil And then, they started to disagree starting on March 9th, and that led to another drop in the price of oil And then the third phase being once the lock downs were really in place in both Europe and North America where you got this huge shortfall in demand So they’re talking, if you think about the whole world oil market as about 100 million barrels a day of oil, a drop of like 20 to 30 million barrels per day And so even though there were some productions kept happening, it wasn’t enough to compensate for the fact that we now have so much oil production supply and not enough consumers for it And that means that we get to this point where producers don’t know where to put the oil that they’re producing They can’t stop production easily because it damages an oilfield to do a sudden hard stop of oil prices, of oil production rather And so you get into this weird situation where the producers are actually paying others to store the oil that they’re producing, and that gets you negative oil prices MARK BLYTH: But is this going to persist? Is this something that we’re going to continue to see because it’s very difficult to build another Oklahoma storage facility overnight, and it’s not clear that the airlines are coming back anytime soon So should we expect this to persist, and if we do, how significant is that? JEFF COLGAN: Well, I think we should expect low oil prices to persist Probably not negative ones, in a certain sense that there was a really weird technicality associated with the day It was only one day where prices went negative, and it had to do with futures contracts rolling over to actual physical delivery Now, we might see you know another day or two of that in the future at those moments when the contracts change, but generally, I think we should expect just low oil prices for some time As you say, demand is going to be depressed for a while, and of course, how long it’s going to be depressed is the $64 trillion question right now Nobody knows, but it seems as though that that stretch of low prices is going to last for a while, and that’s going to cause a lot of economic pain for oil producers in this country and around the world MARK BLYTH: Let me just say to everyone who’s listening in, first of all, welcome if you’ve just joined I know some people are joining us now The Q&A is actually open– we’re using Zoom as the platform– if you have access to that We also have people watching comments on YouTube and other such things, sort of doing YouTube Live So if you got any questions, put them up there, and we’ll try and get to them in the latter half of this broadcast, which is when we’ll open this up to Q&A. So just putting that in there Now let’s get back to what you were just saying there, Jeff, right? One way I’m thinking about this is

you have the Fed, the Federal Reserve, basically propping up asset prices everywhere to stop a complete financial collapse, and therefore, the stock market’s rising at the same time the unemployment is skyrocketing, which is a rather weird one In a sense, is the oil price a better indicator for the true state of the health of the world economy than anything else at this point in the sense that it went negative, and there’s a lot of information in that? Is it more than just a technical blip in that sense? JEFF COLGAN: Yeah We’re getting sort of, as you say, this very strange constellation of signals, right, where the stock market seems to be doing relatively– MARK BLYTH: OK-ish JEFF COLGAN: –OK, right? MARK BLYTH: If you thought the Fed’s going to buy everything, why not buy it, right? JEFF COLGAN: Right, right Where if you compare to a year ago, the stock market is only down just a little bit whereas unemployment is just awful, and I think that’s actually, probably to my mind, one of the better signals But also as you say, oil prices is a good one I think negative oil prices is unusual It’s kind of a freak occurrence, but the massive reduction in demand, that’s a true signal of what we’re seeing right now and what we can expect at least for a couple of months MARK BLYTH: So let’s talk about different countries, different economies, the ways in which this impacts them in different ways We’ve mentioned the US You’ve basically got the shutdown of the shale producers They’re basically being very hard squeezed on this What’s the story for net importers? Let’s start with the EU What’s happening there because of this? Is this a burden? Is this a problem? How does it work out? JEFF COLGAN: Well, it will benefit net importers including in Europe, other than Norway, of course, which is a big exporter, but most of Europe is net consumer, and the trouble is right now, everybody’s in lock down in Europe, and so you can’t take advantage of those lower prices But I think once, and we’re seeing already even starting this week, European countries coming out of the lock down, then there will be sort of an updraft for the economies of those countries from the lower oil prices MARK BLYTH: Would the same true of the east Asian economies as they come out of lock down? JEFF COLGAN: Absolutely So China in particular is going to benefit from this It’s a very heavy oil consuming country, big net importer Same with Japan, Taiwan, and elsewhere, so they will definitely benefit MARK BLYTH: So what about the producer countries? You mentioned Norway, but let’s talk about the Middle East What happens to those guys in particular? JEFF COLGAN: Yeah So the Persian Gulf, of course, is going to be very hard hit This is very bad news for net exporting countries, and in particular, not only the countries that are pumping heavily just to meet their government’s budget, but also the ones that don’t have a lot of fiscal reserves, right? So that’s a double whammy because then they’re going to run a big fiscal deficit, and they’ve got no cushion in terms of a piggy bank And so– MARK BLYTH: Which countries are you particularly thinking of falling into that bracket? JEFF COLGAN: Yeah Thanks So in particular Algeria, Iraq, Nigeria to a certain extent, Angola heavily– those are some of the big countries that I would be worried about not only economically, but even politically, as the unrest starts to unfold and because of the economic consequence MARK BLYTH: So how does this play out in Latin America because you’ve got– they are commodity exporters par excellence? Brazil invested heavily in these offshore deep well issues over the past decade Is it the same story for those guys? I mean, basically, is it kind of the same problems writ large in a different continent? JEFF COLGAN: Yes Ecuador is already applied and basically said that they can’t pay their debts and applied to the IMF for help Venezuela is a continuing ongoing mess, and other producers, Brazil and Argentina, are actually smaller oil producers, but they had made bets on being able to produce, and it’s going to be very tough times for them as well MARK BLYTH: And in a way, just to pull back for a minute, it gives us a really interesting way of thinking about globalization We tend to think about globalization in terms of trade, in terms of financial flows, but there’s also these very basic things like oil flows and then the revenues that come from this So what starts as a kind of supply shock in China and becomes a demand shock everywhere else as we withdraw becomes this absolute catastrophe for these commodity dependent countries that, as you say, have no real budgetary reserves, need to earn dollars to do basic imports, and already– Latin America is the best example– were in deep trouble already So there’s very large repercussions coming from this JEFF COLGAN: Yeah, and it has these sort of ripple effects,

as you say it, kind of all the way around the world where suddenly the Federal Reserve and other central banks are worrying about the kind of stability effects of having many countries in Latin American and Africa that are in deep financial trouble because of that There will be some It’s not all negative because there will be some positives in the sense that the price of fertilizer for agricultural products is heavily linked to the price of oil, and so for many countries that are producing coffee beans or bananas or whatever it is that they’re producing, this is going to be of benefit down the road, but that’s going to take some time to play out MARK BLYTH: Right So even though they’re losing revenue on the front end, you get cheaper inputs on the back end so it’s going to see a redeployment of capital rather than, if you will, it’s complete collapse if we get lucky Let’s try and accentuate the upside of this The air is fresher You can see the arch in Delhi All the aircraft are grounded, so that’s a large chunk of emissions gone What’s the environmental story on this because there’s got to be a short run, long run on this as well? Short run, you’re encouraging more use, but you can’t actually do it because we’re all locked up, but eventually, you would hope to get out, and then, that will encourage more It seems to be structurally low because there’s so much supply out in the market just now Does that get us farther along the road to dealing with climate change, or does it hold us back? JEFF COLGAN: Yeah So with Earth Week just last week, I’m glad you’re bringing this up, and I think you’re absolutely right on both the sort of short term and the long term The scariest thing that we are starting to see, though, is that some of the oil producers faced with that problem that I was mentioning at the beginning of having nowhere to go with their oil, there’s at least some reports now coming out of Russia, and this might become a thing for US as well, where oil producers are actually burning their oil rather than leaving it in the ground, right, so which is, of course, from an environmental perspective, just a total disaster in the sense that we’re in a point where we’re already– MARK BLYTH: But hold on Why would you do that? JEFF COLGAN: Yeah, so this– MARK BLYTH: Why not just leave it in the ground, right? I mean, why do you have to burn it? JEFF COLGAN: Yeah It seems so crazy, but it really is this idea– I mean, I think intuitively, we have this sense that oil fields are like a wine bottle, right, and you could put a cork in it and come back to it later, and that’s not the way oil fields are That you have to keep the pressure up If you do a sudden stop to them, you damage them, and therefore, lose the kind of revenue stream going forward because you’ve now damaged your oilfield And so– MARK BLYTH: Absolutely JEFF COLGAN: –you’re making this long term trade-off there as well where a producer might decide, well, if I keep producing now, burn it up or do whatever I need to do, then in the long run when oil prices recover, I’ll still be able to sell this stuff for a profit down the road MARK BLYTH: So there’s the question I mean, none of us know exactly what the growth trajectory of the future is going to be locally or globally, but is this one in which oil is increasingly written out of the script, or is it one that oil now has an unexpected comeback? JEFF COLGAN: Yeah So I think the story right now is all– the headlines rather, are all negative on oil producing, and that’s right that they are going to face a heck of a demand shock, and it probably will help people change their view about the attractiveness of renewables But there is a countervailing force as we’ve said on so many of these topics in that, as you know, electric vehicles compete with internal combustion engines, and when gasoline is cheap, it makes the conventional cars a lot more attractive than their hybrid or electric vehicle competitors MARK BLYTH: But all of that, of course, is contingent upon in a sense the global economy coming back pretty much as it was before, right So the Germans will make BMWs, and they’ll sell them to the Chinese They’ll make them here and sell them to Americans, and other countries will consume them, and they will export them, et cetera It’s not clear, particularly if this continues through multiple waves of the virus, that those types of growth models if you will on those traditional industries are sustainable over the long run So I’m thinking particularly of oil just as a business, can’t it go bust? I mean, can’t it ultimately just go bust because nobody’s buying this stuff, and the cost of capital is too high relative to what you get for taking it out of the ground, and game’s over, right? JEFF COLGAN: Yeah I think that it doesn’t go bust in the short term, but it might shrink a lot, right So even if we went from a world where we were consuming 100 million barrels a day down to 50, that’s a massive shift in the structure of the world economy That means whole countries stop producing oil, which include,

could include my home country of Canada, which has high cost of production oil You could imagine a total sweep of Alberta and Saskatchewan, which has got huge political consequences as well But I’d love to ask to get your thoughts, too, you about what are the other sectors that might disappear You have to think about cruise lines Who’s going to want to be on a cruise for a while? Or at least that’s what I think, although I hear that some people are buying tickets into the future So which sectors do you think are going to shift the most? MARK BLYTH: So this whole thing for me goes back to one point I’ve been thinking about more and more, which is what’s the behavioral response? All right So there’s some theater that I saw in a report, which I can no longer find, and it’s annoying me because I read on the web I’m desperately looking for this But basically, what it said was if you look at areas of China where you didn’t have a big shock, you nonetheless have a huge behavioral response People just aren’t going out as much You can open up the movie theaters, but it doesn’t mean they’re coming back And if you have second and subsequent waves of this virus, the behavioral shock might be bigger than the initial economic shock where the two of them will get compounded So that’s the problem if we go down that road So exactly, you’re right on cruise ships I mean, why on Earth did we bailout cruise ships because if you think that there’s a major behavioral change likely, it’s if you go on this boat with 1,200 other people, and one of them gets it, you’ll be stuck in dock for a month Do you really want to take that chance? So that says to me that industry’s toast, and yet we went along and bailed it out, at least in the US So let me push this back to you and then go back to the United States on this one There was an interesting piece in the Financial Times by Megan Greene, who’s an affiliate of my center, on bailing out the oil industry, and what she said was no, don’t even think about it, right? But on the other hand, if I think about kind of the political economy of the US, I can identify a dozen states– they tend to be Republicans They tend to have balanced budget amendments, which means that they’re heavily dependent on current revenues for spending– a lot of that– they are carbon extractors, refiners, producers Think everywhere from Alaska to Louisiana, right? And they’re about to get an awfully big shock because of this So rather than sort of individual sectors, it will be interesting to think through which regions of the country are going to be most upset by this type of thing What are your thoughts there? JEFF COLGAN: Yeah North Dakota, in particular, should be right at the top of our mind right– spare a thought for North Dakota because maybe it’s good for the climate It is good for the climate if the oil industry there shuts down, but this is a terrible way to do it in terms of the awful impact it’s going to have on workers and families I think Megan Greene’s piece was fantastic, and it was right on the money The political momentum for, or the political pressure for some form of oil bailout, I think, is going to be very hard to resist I’d be surprised if there wasn’t some form of bailout And so then the question is are there good or bad ways to do this? And I think the answer is yes because we’re leaning towards, at the moment, the bad ways, which is to say, OK, let’s throw grants or loans at the oil companies And I would much prefer to see us investing that kind of money in the workers and taking care of the people and helping to retrain for a different form of energy economy in the future because we can move to an economy that is much less dependent on fossil fuels if we choose to And why wouldn’t we do that at this point? I think it just makes sense MARK BLYTH: Well, we would choose not to do so because the oil sector is critically important as it stands to the welfare, well-being, and tax base of very, very important states If you want to win the Senate, or if you want to win the presidency, et cetera So the lowest common denominator is bail rather than fail and then hope that they like you So there’s a, I would say, an electoral politics built into this one Let’s go bigger Let’s go macro [INAUDIBLE] We’re getting some very good questions coming in, and we’ll turn to those shortly, but let’s go macro on this one So as a child of the Cold War and as a student of international relations– I did my graduate work at Columbia, a student of Bob Jarvis– I was used to a world in which there was first of all, the Soviets Then, there was NATO and us freedom loving countries And then, the Soviets died, came back as Russia The United States is still basically friends with the Europeans and the Canadians and all the other people, and then, along comes the Trump moment, right? Along comes neo-nationalism, not just here, but globally It begins to change it So two directions I want to push on this one The first one is why do I think now

that the United States has more in common with Russia and Saudi Arabia than it does with the Europeans? And the second one is is there not an argument that all governments will be making about strategically important sectors? So for example, with airlines, I can imagine Virgin going to the wall, but as we see with the KLM Air France bailout, you’re going to keep one British airways is probably going to get a bailout, right? I don’t know if cruise lines fall in to that They’re not strategically important But your oil sector, surely that’s strategically important Are we going to see a kind of renationalization of these oil companies back to the old model of having national oil corporates, and this is how we’re going to get there? So let’s explore those two themes JEFF COLGAN: Yeah So you definitely do see a triangular relationship between the US, Saudi Arabia, and Russia as the three largest producers by far of oil in the world And so you see President Trump trying to organize an agreement between them But I will say, I think that was wildly over-hyped, that his role in particular, the US role in organizing that agreement was far overdone because that probably would have happened anyway as the fact is that the US is a marginal net exporter at the moment and will soon become a net importer again And so, while it sort of was temporarily aligned in that sense, I think that its long term interests are going to still be probably closer to Europe than the other two And Saudi Arabia and Russia, they made an agreement that didn’t actually involve the US at all, right? The US only promised to make production cuts that would be forced on them by the market, by the fact that the prices were coming down So they didn’t actually do anything different than what the market was suggesting in the first place And now I’m forgetting, of course, the second part of this– MARK BLYTH: The second one’s about the renationalization of oil and oil companies because it’s such a strategically important sector even if you want to make the green transition One of my favorite examples for this is coking coal The steel that you need for making windmills has to be done through coking coal All right So do you open up coal mines if you want to get there, right We’re all still going to fly for a while, even when this comes back, perhaps not as much, which means that you will still need these types of fuels So if they are strategically important, do we see in this kind of neo-nationalist moment a rebirth of the type of national oil companies that dominated the world in the ’50s and the ’60s? JEFF COLGAN: So I think the oil industry does a brilliant job often of talking about how security important it is It does this thing called securitization, right, where it claims that a strong American oil industry is in the vital national interests of the United States, and most of that is hogwash In fact– MARK BLYTH: Tell us why Tell us why Go on That’s really important Tell us why that’s hogwash JEFF COLGAN: The US does have an important interest in being able to supply its military if it’s ever in a war, right So that is important, but the US military consumes somewhere between 2% and 5% of US consumption of oil So it’s a very small provider, and there’s no question that Texas and Louisiana can continue to supply the military’s needs without any government support whatsoever So that part of it is already taken care of What this is mostly about is an economic question of distribution, right, of redistribution of winners and losers So the consumers of oil, which is you and I, anybody who’s filling up their gasoline tank on a regular basis, benefit from lower oil prices where as the producers benefit from higher ones And that’s the struggle, and they sort of want us to believe that we should have higher oil prices for that benefit The US has never had a nationalized oil industry The closest it got to that was in World War II, and even in the face of this extraordinary war, the oil industry would not go along with that, and I don’t see it I know there is a lot more discussion about that topic now, but I’m skeptical that we’re going to get to that point in this country In other countries, in Europe particularly, it’s much more plausible because the idea of nationalization has always found more fertile ground in those politics MARK BLYTH: But is there also an exporter importer dimension here in that exporters do not want control by governments They like free markets, et cetera And then the importer’s would actually like to have control over supply because it’s insecure? Is there something in there? JEFF COLGAN: That’s interesting I mean, there is, but there’s also– if you look at Saudi Arabia and Iran and Nigeria, they all have national oil companies, and so there’s nationalization actually on both sides

And the US is particularly wedded to a capitalist model for better and for worse And so I think nationalization is less likely in this country MARK BLYTH: Yeah I mean, a good example of that [INAUDIBLE] is the comparison between airlines So basically, the British chancellor has said explore every other possibility Literally go find the change down the back of the sofa before you come to me because if you come to me, I’m taking ownership stakes And when that was floated, Boeing’s chief executive came up and said, oh, no, no No, no No way No, we’ll take the money, but you don’t get ownership, right? So yes, there’s very much a different politics on this Before we go into Q&A then, let’s just talk finally about– do a couple of scenarios and then the winners and losers Let’s suppose that there’s an effective vaccine within 12 months There is no recurrent virus waves We do begin to bounce out of this quite quickly What happens to the oil price, and what happens to, if you will, the politics of oil in that scenario? JEFF COLGAN: Well, you can imagine I mean, right now, the price of oil is about $20 a barrel You could imagine us returning to $40 a barrel under that sort of relatively rosy scenario relatively rapidly Maybe even higher If it gets up higher than that, of course, you attract new production, and all of those production cuts that we’ve been adopting in the last month, they melt away, and so that stabilizes the price So I don’t see it going much higher than that And that’s still, let’s keep in mind, much lower than January 1st of this year It was $70 a barrel So either way, this has been a big change for the US industry MARK BLYTH: Can I ask a question that’s somewhat off topic– well, it’s on topic, but it’s not where I was going to go next, but I thought of it Whatever happened to peak oil? JEFF COLGAN: Right So peak oil demand versus peak oil supply are so different, right? So this idea that we were going to run out of oil, it’s sort of disappeared in a couple of different ways, but shale industry and the fracking revolution, I think, in some sense crushed that idea that we would get to a point where we just didn’t have enough oil in the geology of our Earth Instead the thinking now, I think, is much more about peak oil demand and when the global energy system moves away from fossil fuels in part, of course, linked to climate change MARK BLYTH: So then let’s do a second scenario, and then, we’ll go to questions A much less benign one– rather than the bouncing V or the extended U, that we permanently shift down to a lower set of growth trajectories across the world, that consumer’s expectations, [INAUDIBLE] expectations are revised down, that not third of GDP, we really do lose it, and we move into a different track– what happens to the oil industry then in the centrality of oil to world politics? JEFF COLGAN: Yeah It’s going to change dramatically Of course, we have to work this out, but I think it’s much more a country by country scenario, right So there are going to be some countries, as I said, Canada among them, that are high cost production countries that will just get wiped out and exit the business more or less completely whereas Saudi Arabia is going to be pumping oil until the end of this century, I would expect, and quite a bit longer than that in the sense that their oil can be produced at around $10 a barrel profitably And so when they’re able to do that so cheaply that it’s hard to imagine that they’re going to be kind of driven out of business under any economic scenario The US is caught in the middle, and that’s really why it’s so complicated here, and I think most cost estimates are around $35 to $40 a barrel for oil producers But what we saw in 2014 when the price of oil fell dramatically then, too, was that at that time, the estimates of cost profitability was around $65 a barrel, and the frackers and the shale industry grew quite a bit more efficient and lean and productive And so one never knows what the next set of innovations might allow MARK BLYTH: Yeah So that’s great We’re at the halfway point so let’s turn to questions There’s a whole bunch of them come here If we don’t get to your question, I do apologize because we do have too many so I’m going to have to pick and choose here Following on from the themes that we’ve been talking about are three of them grouped together here So let’s go with the first one So this is from Tom Slate Can shale oil even continue in a world of low price crude? If we get stuck basically at the lower end of the scale,

does that just kill the shale oil industry permanently? JEFF COLGAN: Yeah So in the short term, shale will persist, I think, and of course, it will be the leaner and low cost versions of shale that will persist In the longer run, I don’t know is the true answer that I think the conventional oil is in the places with the right geology, it’s always kind of at the bottom end of the cost curve, and it’s the most profitable oil It’s possible that shale in the US would just get wiped out because of that, but that’s a multi-year scenario, and there’s so many unknowns in the next two years that that would not be the one that would be at the top of the deck for me MARK BLYTH: But thinking of the politics of this then, given that it’s a huge number of small producers, that makes it a bit more difficult to bail out If you’ve got one or two big companies, and you could just funnel money to them, then classic American bailout If it’s lots of small producers as we see with what happened with the Small Business Association and the Paycheck Protection Program, that spells trouble in the sense that it’s very hard to bail out fractionalized industries like that JEFF COLGAN: Yeah What we might see is the oil industry becoming a lot more like the tech industry in the sense that small companies grow for the express purpose of being bought out by one of the giants, right MARK BLYTH: By Google, right Yeah JEFF COLGAN: By Google, right And so in the next little while, we’re going to see a lot of mergers and acquisitions, I expect, in the oil industry because of the hard times But regardless, we might see the kind of industry structure where Exxon and Chevron become the market makers that choose OK, what do we expect are the best bets out there of these small fry, and we buy them up, and let the other ones die MARK BLYTH: Yeah Wow So basically a kind of like private equity scenario or writ large for the oil industry with lots of consolidation Following on from this, let’s talk about the politics beneath all of this Timmons Roberts who you know, one of our colleagues at Brown, is very interested in the climate change denial industry, and he asks, if we go to $10, to $20, to $30 a barrel, the companies’ profits along with their share price gets totally hammered What happens to the ability of these companies to fund those types of climate change denial networks? Does that put a cramp in those political ambitions? What do you think? JEFF COLGAN: I do think that it shrinks resources, and so from that sense, it could be a net positive story if you’re concerned about climate change But I also think that there’s a certain segment of the kinds of regulations or the efforts, the lobbying efforts for bailouts, that are so important for this industry that those are not surplus expenditures Those are essential expenditures And so if we think that the current expenditures are around $200 million a year by the oil industries resisting environmental legislation, maybe that shrinks, but it doesn’t go away completely MARK BLYTH: But if they want a bailout or if we renationalize them, couldn’t we just say now you don’t get to do this anymore? JEFF COLGAN: Yeah If we renationalize, absolutely MARK BLYTH: Yeah Marc Saltzman asked this one On the renationalization of energy production, is there a potential climate gain to this? How would the politics of this shift if oil reserves were owned by the state rather than by private interests? JEFF COLGAN: Yeah There’s a huge upside on the climate side for nationalization, I think, to the extent that the government is helping out oil companies It can and should expect equity stakes, and there should be rules attached to it It shouldn’t be a blank check on public money to a big oil industry that has benefited massively from the upside of capitalism and is resisting the downside risks of capitalism So there is a role to play here and a way forward on the climate side, but the question is, the hard question is, whether the politics of a Republican controlled Senate would allow for those kinds of requests and rules on oil companies Would they be put in place by a Republican led Senate? MARK BLYTH: [INAUDIBLE] But another of our colleagues, Patsy Lewis, has asked this one What are the likely implications for Guyana which has just started oil production? JEFF COLGAN: Yeah So Exxon has said that it will continue to go ahead with the Guyana project in the sense that it was a long term exploration– not exploration– a production project Anyway, I mean, this is something that they expected to unfold over decades So I don’t expect it will suddenly evaporate, but there is this question of, well,

what happens if Exxon itself runs into trouble because of all of the difficulties in its home market And those questions are anybody’s guess MARK BLYTH: Right Leslie William Robertson asked the following question– how do you see the collapse in the oil price affecting current geopolitical conflicts and pressure points? The low price and challenge of storing oil suggests a diminished motivation for conflict to capture the resource, yet major wars drive demand for oil and might support the price So in a sense, if it falls to low, does that create an incentive for conflict? Now, this is something that you’ve written about more than anybody else So let’s go for the Jeff Colgan opus on this one What’s the relationship between the oil price and conflict? JEFF COLGAN: Well, I would like to be able to paint a mostly happy story on this in the sense that, for instance, Saudi Arabia backing out of Yemen as we’ve seen in the last couple of weeks I think they painted it as a humanitarian story about oh, well, we don’t want to make things worse with the coronavirus outbreak My skepticism about the Crown Prince’s humanitarian instincts is very high And so I think this was actually much better explained as a fiscal story that they were trying to reduce what is a very expensive war machine And so lower oil prices in that sense, I think, does drain the capacity, not immediately, not tomorrow, but over time, drain the capacity of oil producing states to get into wars, to get into foreign policy misadventures of various kinds That’s my mostly positive story There is a little worry, though, about the fact that President Trump does have on some level an incentive to engage in conflict with Iran probably because turmoil in the Middle East does tend to prop up oil prices And so that is a very scary side and sort of scenario And you’d like to think that the White House would not follow that logic too far, but it’s hard to say MARK BLYTH: And what about Nord Stream 2? This is a question that came in off of YouTube So I’m sorry We don’t have your name, unfortunately, but thanks for bringing it up So how does Nord Stream 2 factor into this? The Americans have basically put sanctions on the Russian companies that were doing it The Germans want it The Germans have completely lost faith in the United States under the current administration and are trying to find ways to basically make it happen because that’s their energy security How does that one play out? JEFF COLGAN: Well, I followed Nord Stream 2 very carefully when I was in Copenhagen last year because they were sort of the final turning point, and Nord Stream 2 seems like it’s going to go ahead It’s basically cleared all of the major hurdles and obstacles And so at this point, although the US has worked hard to oppose it, I think that the US has now lost the battle in that respect, and Germany is going to get Russian natural gas The bigger question is whether the US is right in the long term to worry about German dependence on Russian natural gas and whether that comes with political ties Germany’s leaders are betting that it doesn’t, and we shall see MARK BLYTH: Mhm Definitely So here’s another one from YouTube that brings us into interesting tertiary territory What happens to tertiary industries in all of this? Other major subsistence sectors of it all will survive What’s the path for rebounding in services? And I would just add to that, let’s think of this historically When we think of oil crises in the past, the one that comes to mind is the 1970s– large price increases, inflationary effects, et cetera, et cetera, right? But this seems to be very different It’s quite the opposite I mean, there’s a massive deflationary effect, right, rather that that, but also, our countries’ growth models and industries have dramatically changed We’re no longer making stuff We’re basically selling each other’s services and essentially use more oil, but much less intensively So walk us through a couple of sectors Basically, what happens if your– you mentioned fertilizers, but what about plastics and chemicals? Is this great because these guys have now got lower input costs and that helps get away from the deflation of the current moment because of lock down And then services– I mean, beyond driving to work– nobody uses heating oil anymore In the ’70s, they used to actually pour kerosene into heaters in factories and burn it in the room, right Nobody does this anymore Is there a way in which oil matters less even though we still think it’s incredibly important? JEFF COLGAN: Compared to the ’70s, it certainly matters less for heating and for electricity, and so what’s crucial about that is that there are other fuels that can compete for electricity and heating, right So coal and natural gas and wind and solar, they can all do that The thing about oil is that it’s king on transportation And so that’s where it matters most, and it continues to be sort of the lifeblood

of the modern economy That part hasn’t changed I do think that this lower oil prices is going to help a lot of sectors of the economy like Amazon or any other delivery business, which is, of course, benefiting massively by all of us being shut in Well, they drive trucks, and so the cheaper fuel prices are going to help them a lot it is going to help the airlines if they ever get some customers again to fly cheaper because about a third of the price of the cost of your ticket, right, an airline ticket, is fuel costs So that’s going to help The ones that are really going to get slammed are the oilfield services It’s not the big oil companies that you know of like Exxon and Chevron, but the Halliburton’s and the Schumberger’s and the Baker Hughes, which are huge oil firms that employ tons and tons of people who do actually do a lot of the physical work of lifting oil out of the ground Those ones are really getting destroyed in terms of their earnings and revenues over time MARK BLYTH: A couple of other questions just popped in, one from John Irving , who’s a local around here I’m going to embellish this a little, right Trump loves tariffs So what’s the prospect of a tariff on Saudi oil at 40 bucks? Take the difference between market and 12% and apply the rest as a tax to the recovery to the US treasury Can’t we benefit from this? In a sense, protect our oil, punish the Saudis, even though they’re our allies, and basically, get some rents in to basically help the bailout JEFF COLGAN: Yeah So this is definitely one way of making sure that the revenues flow to American companies or at least to an American government that can then redistribute it in some way as opposed to foreigners But remember that every tariff we put on foreign oil is going to hurt consumers as well, right We’re driving up the price for US consumers And so this is not so much a national issue This is an intra-American distributional issue, right It’s producers versus consumers within the country because we are, at this point in time, basically balanced between how much we produce and how much we consume So there’s sort of an equal weight on both of those sides MARK BLYTH: Yeah So it’s not– sadly, tariffs are not always the answer Well, who knew? Will we see the end of the use of the dollar for global oil trades? What do you think? JEFF COLGAN: Well, that one has been around for as long as I’ve been watching oil politics It continues to get floated, but it’s actually more in Mark’s area of expertise than mine I think that question is deeply connected to how long does the US remain the global reserve currency, and my understanding is probably a lot longer still But Mark, you should– MARK BLYTH: I would say a lot longer than us And the basic story I tell all the time is that everybody’s growth models are interdependent with each other You can only have giant export platform models like the Germans to the extent that we run chronic deficits Now, given that we run these chronic deficits, we pay for stuff in dollars We are never going to make real stuff to volatilize those claims on those BMWs that we’re actually bringing in, right? So what happens is all those dollars go to the foreign banking system They can’t actually use them because you have a different currency, et cetera So you have to turn it into an asset to make it not a liability on the balance sheet of these banks so you buy treasuries And then when you buy treasuries, that just comes back to us to allow us to do more stuff And when you’re basically 70% of all trades, 70% of all reserves, you’re just not going anywhere I mean, another interesting angle on this, though, that came in was a question that came in quite early off of YouTube Are we witnessing a sort of Dutch disease lesson en masse, and what will we learn from it? Does the lesson for commodity exporters differ from the general lesson of lacking redundancy, having a diverse portfolio, companies and assets, a diverse economy, et cetera? So just as oil if you are Venezuela, if it drops, you’re dead, right? In a way, the United States– and actually Brendan Greeley of the Financial Times is writing a book on this topic– the dollar is a kind of a commodity that we export to the rest of the world that everybody else has to use, but we’re the only producer And in a sense, that makes us lazy We can have crazy politics and do whatever we want because ultimately, there’s no alternative to the dollar It’s kind of like an equivalent to oil in that sense, although there seems to be no downside It doesn’t seem to drop the downside in the way that oil does So no answers, but definitely a set of interesting questions JEFF COLGAN: I mean, let me say on the Dutch disease One of the components of the sort of resource curse generally is huge volatility of the revenue flows, and that, we are absolutely seeing en mass in that the US is experiencing it,

lots of other countries are experiencing it, and in both directions where the consumer countries and net importers love to see lower oil prices, but it hits very hard on the exporters And one thing, if we’re talking about kind of interesting, unusual geopolitical alignments, China gets a lot of its oil from Angola, and Angola’s oil is very expensive, and they are going to run into deep trouble And so what we might see is China consuming a lot more Saudi oil instead of Angola oil, and that creates an interesting dynamic where the US and Saudi Arabia have always had a close relationship Will the relationship with China now become stronger for Saudi Arabia? MARK BLYTH: Interesting Just on the same point before we move on to volatility, question just came in, why is China not taking this chance to dump dollars and kill the hegemony of the dollar? Because that’s their national savings, and if they dumped them all, they destroy their national savings So you can do it, but it’s a bit like Italy leaving the euro You would basically destroy half of national savings in the process so you’d be worse off than sticking with it Basically, it’s kind of like putty You’re stuck with it JEFF COLGAN: There’s a remarkable story You know this better than I do, Mark, but that remarkable story of how in their financial crisis, apparently Russia went to the Chinese and said, let’s work together to dump the US treasuries and really hurt the Americans And that seemed like a great idea from Russia’s perspective, but China said, no way, we’re holding most of those treasuries We don’t want to lose all that value MARK BLYTH: Absolutely Absolutely Back up to volatility– so Marco Vinte, and then, some one else came in in a similar topic, so I’m going to bring these two things together here Marco says the shale question touches on the consideration that renewable energies cost of capital has steadily fallen over the years Naturally, volatility should also be considered Does this event prove that oil and gas may not be priced properly in markets given the volatility that can arise? Let me link to something else Solar is killing fossil fuels in solid liquid gas order When’s the tipping point for more money going through renewables instead of gas? So we’ve said that because the price has fallen, you get the short term, if you will, delayed action on it, but let’s consider the volatility as a problem, right You don’t get that vol with renewables So if you want to invest going forward, surely you want something that’s got low vol This proves that oil and gas really is mispriced pretty much a lot of the time because if we remember 2006– what did it peak at? $146 a barrel? JEFF COLGAN: Yeah MARK BLYTH: Yeah Right And now it’s negative, right So that’s the definition of volatility So let’s play with this volatility issue I mean, if you’re going forward, and you’re trying to secure your energy supply, and you want to have regular electricity, et cetera, you want something that’s low vol You don’t want this stuff JEFF COLGAN: Yeah So it’s always been a boom bust industry going back a century It’s very difficult to get away with that unless you have a worldwide oil cartel, which has only really ever been achieved once, which was under the Seven Sisters, these oil companies, Anglo American oil companies in the ’50s and ’60s, that could do it But since then, we’ve had very high oil volatility, and that does, I think, make renewables more attractive because they can have steadier prices But think about right now how natural gas is very often– the price of natural gas is linked to the price of oil So natural gas prices are also very low, and if you’re a natural gas power plant, you’re sitting very pretty right now You are out competing my guess on economics You are out competing the renewables when natural gas is this low It’s like between $1 and $2 per whatever, 1,000 cubic feet MARK BLYTH: Wow Why is it linked? Because they’re distinct things, right? JEFF COLGAN: They are distinct things, but they are often linked in part to control the alternatives, I think, and also because gas consumers want to contract around something that gas producers can’t game And so the idea is that world oil prices are exogenous Nobody can mess with those too much And so that’s why gas prices are linked to them in [INAUDIBLE] MARK BLYTH: Right Question that came in from [? Benish ?] [? Pervis. ?] What are the economic consequences for the US when they choose not to extend liquidity swap lines to China and Russia? Short answer, nothing because ultimately, they still need dollars That’s pretty much it

It goes back to that idea of the dollar as commodity so we don’t really have to worry about because we are the only producer in that sense Anything else that you want to talk about, Jeff? What haven’t we covered? We’re getting into the last 10 minutes JEFF COLGAN: Well, just on that point that [? Benish ?] asked about the– because there was this interesting arrangement between 14 central banks that the Federal Reserve was at the center of and helping them out, and then China and Russia were not part of that And so there was this question, I think, temporarily about whether China and Russia were on their own in terms of managing the pandemic crisis And then, Mark, you know this better than I do, but as I understand it, the Fed basically said any central bank that has assets in the New York Federal Reserve can borrow against them And so they basically helped stabilize Russia and China as well in the sense that they could use those assets MARK BLYTH: Yeah So the ECB can take dollar assets and then give them to China So basically, it’s a kind of don’t ask, don’t tell, right? That’s really what’s going on Like so much of what the Fed is doing because they– when you’re buying ETFs and at the same time using BlackRock as the people to help you understand what’s going on– whoo, there’s a few conflict of interest questions there in my opinion, but that’s a different story Like I said, anything else that you want to talk about? JEFF COLGAN: Nothing that leaps to mind MARK BLYTH: We’ve got a new one coming, a new one De de de de de de de Not really seeing the question I wish I could see the question in that one, but I don’t really see it I don’t know Have we explored it? Have we exhausted it? Have we flogged the proverbial dead horse? JEFF COLGAN: Well, I would say that the– I mean, the dynamics around OPEC are probably the continuing story here That there is a question about how much they’re going to be able to cut, and they made this almost 10 million barrels a day cut over Easter weekend As I said, there were other cuts that were sort of promised by the US and other non-OPEC producers, but those were all market driven cuts so they’re not real cuts But OPEC, actually, was making a commitment to cut starting May 1st, right? So even though they made that promise, those cuts haven’t come into force yet, and so one question here is how does the oil price react once those cuts are actually in play? MARK BLYTH: Here’s two questions One of them came in, and the other one I just thought of that we can use in closing Is OPEC of any of relevance at all anymore? JEFF COLGAN: So I have been arguing for years that economically, it is not relevant It is not relevant because they can’t actually get agreements that they stick to They say, OK, we make an agreement in Vienna, and there’s a big splash in the newspaper headlines, and it actually does move the prices a little bit in the week afterwards But then, if you look at– you actually follow the story, and of course, it disappears from the media, but the compliance on those agreements is abysmal And it’s very unclear that OPEC is actually changing any of its members behavior, right, in terms of what they would have done otherwise So when they make announcements like that, they’re very often saying, here’s what we were going to do anyway, and OPEC isn’t actually driving the bus so to speak It’s really Saudi Arabia that is signaling to the market, here’s what we expect the future to hold MARK BLYTH: And then a very simple one, but a very interesting one Does a change of President in November, assuming such a change happens, assuming such an election happens– let’s assume that happens There’s a change of President Does that have any bearing on this at all? JEFF COLGAN: Well, I think it does matter in terms of the form of the bailout for the oil sector I think it could change a lot in terms of to what extent we are helping oil companies versus either helping the workers or doing some sort of public equity stake from the US government getting– so that, I think, matters a lot, and of course, it’s not just the president that matters It’s Congress that’s going to matter, but to the extent that there could be a shift in political winds That could be very consequential for the US oil sector MARK BLYTH: OK Just one final question then, and we’ll close it out on this one seeing as it’s a [? night. ?] It was actually the first one to come in, too, so I’ve been saving it up It’s Chris Garrity asked the following question– I’m going to ask you particularly, Jeff– what major assumption, if any, underlying your views of international energy and economics have changed over the past five, six weeks? What’s happened that’s made you go,

oh, I really need to kind of fundamentally rethink something? JEFF COLGAN: That is a great one I’m not sure this qualifies as a fundamental principle of IR, but when I first read about the possibility of negative prices– about six weeks ago, oil analysts started talking about it– I thought, oh, come on It couldn’t get that bad, and then as I sort of started to dig into it and think about, well, maybe what would the conditions be that could make that happen, it did start to seem like a real possibility And actually, 10 days before oil prices went negative, I was on Al Jazeera saying, oil prices are going down, which is a thing I normally do not do I do not predict oil prices There’s too much randomness in it, but in this part, the fundamentals were just so glaring that I felt comfortable making that call MARK BLYTH: I guess a call which you can probably continue to make at least for the foreseeable future JEFF COLGAN: If only I had some way of making money off of it That’s– MARK BLYTH: Exactly Well, I mean, you’ve got this whole contango in the market whereby the forward price is higher than the futures price, et cetera So I’m sure there are some clever financial engineers somewhere making money off of it JEFF COLGAN: Oh, yes MARK BLYTH: But like you, I have no idea how to do that, and it’s too complex, and it’s much easier just to not bother All right Well, thank you very much, Jeff This has been incredibly enlightening and undoubtedly entertaining at the same time, which is what we strive for So [INAUDIBLE] next I think you should know and view someone else at Watson JEFF COLGAN: Sounds like a– MARK BLYTH: So that will be the next one, and we’ll go from there JEFF COLGAN: You’re a very good interviewer Thanks so much, Mark MARK BLYTH: OK Thank you very much [MUSIC PLAYING]