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Powering the World

Wednesday, February 1, 2012

Daniel Yergin. The Quest: Energy, Security, and the Remaking of the Modern World. The Penguin Press. 804 pages. $37.95.

Afew days before the official release of his new book on energy, The Quest, Daniel Yergin published a piece in the Wall Street Journal under the headline “There Will be Oil.” That title alludes to the 2007 movie, There Will be Blood, itself based upon Upton Sinclair’s classic novel Oil. Yergin, like Sinclair, understands oil’s ability to stir the blood. But he is more disposed to see oil’s benefits.

The Wall Street Journal article summarizes a chapter in The Quest which asks, “Is the World Running Out of Oil?” and answers: No. Yergin has long disagreed with the pessimists who predict that we’ll soon arrive at “peak oil,” the point at which the maximum rate of production is reached. He notes the many times since 1885that experts have made similar predictions, only to see both production and discovery continue to grow. Yergin doesn’t see the supply of oil as infinite, but he objects to the metaphor of a peak, with its suggestion that the far side will be a slippery, precipitous slope. Rather, he sees a “plateau — perhaps sometime around mid-century — at which time a more gradual decline will begin.”

That belief may have determined the way The Quest is organized. The first half of the book consists of two parts: “The New World of Oil” and “Securing the Supply.” Taken together, they form a logical sequel to The Prize, Yergin’s Pulitzer-winning chronicle of how oil became the key economic force of the 20th century and drove much of its politics as well. The second half of the book is divided into four parts: “The Electric Age,” “Climate and Carbon,” “New Energies,” and the “Road to the Future.” Important as each topic is, The Quest still keeps oil at center stage; the chapters on recent developments in the world of petroleum are the most compelling parts of the book. The author’s access to many of the principal players — the bibliography lists 146interviews — adds depth and immediacy to the narrative.

Yergin begins with Russia, just after the fall of the Soviet Union. The ussr’s collapse closely paralleled the depletion of its hard currency. The Soviets possessed abundant gold reserves, but during the 1980s the price of gold fell by 70percent. However, a parallel collapse in the price of “black gold” interests Yergin more: “One of the lasting ironies of the Soviet Union was that while the Communist system was almost synonymous with forced-pace industrialization, its economy in its final decades was so heavily dependent on vast natural resources — oil and gas.”

The oil industry, already as inefficient as the rest of the Soviet economy, declined even further as the ussrdisintegrated. Trying to restore it, Boris Yeltsin’s government borrowed money from wealthy oligarchs and, unable to repay the loans, sold major portions of the oil companies to them. The fortunate few who bought these companies, like Roman Abramovich and Mikhail Khodorkovsky, became among the wealthiest men in Russia.

But not everyone agreed that Russia’s oil and gas resources, the key to its economic power, belonged in private hands. One who decidedly thought otherwise was Vladimir Putin, who succeeded Yeltsin to the presidency in 1999. He still sought the cooperation of major Western oil companies — bp, Exxon-Mobil, Shell, and Conoco — and at first conceded fairly generous terms to them. But Putin later told bp’s ceo John Browne, in 2003, “an equal split never works.”

Abramovich saw the tide turning against privatization, sold his interest back to state-owned Gazprom and moved to England, where his estimated wealth is second only to the Queen’s. The more ambitious and stubborn Khodorkovsky fared less well. He’d talked to both Chevron and Exxon about selling controlling interests in his company, intending to use some of the money to advocate making Russia’s government a parliamentary system, thus reducing the strength of the president. Khodorkovsky was arrested in 2005 and convicted of tax fraud. At a 2011retrial, the sentence was extended.

In the 19th century, the contest between European powers over the resources and trade routes of the Central Asian steppes came to be called, in a phrase associated with Rudyard Kipling, “The Great Game.”

Russia’s efforts to recapture control of its oil reserves extended to the former Soviet Republics of Kazakhstan, Azerbaijan, and Turkmenistan. After the Soviet Union broke up in 1991, the Russians still viewed these states as within their sphere of influence or, as they put it, their “near abroad.”

In the 19th century, the contest between European powers, especially Russia and Britain, over the resources and trade routes of the Central Asian steppes came to be called, in a phrase associated with Rudyard Kipling, “The Great Game.” Strobe Talbot, Bill Clinton’s deputy secretary of state, sought to downplay modern parallels, insisting that the notion “belonged on the shelves of historical fiction.” But it was no fiction that the United States and its oil companies sought very different outcomes from those of Russia, who viewed Caspian oil as its own.

The local governments of these states had their own thoughts on the matter. Azerbaijan negotiated with American and other foreign oil companies to rebuild production facilities and pipelines, even as the Russians proposed a pipeline that ran mainly through their country. Eventually, a consortium of oil companies that included bp, Amoco, and Russian-owned Lukoil developed a two-track strategy, with a second pipeline that closely paralleled the route of a wooden pipeline that had shipped oil for the Rothschilds and the Nobels a hundred years earlier through Georgia to ports in the Black Sea.

A similar contest played out in Kazakhstan, where that government also leveraged the presence of the American oil majors Arco, Mobil, and Chevron, to fend off some of Russia’s demands. The redevelopment of the Caspian region has been accomplished through joint ventures of investor-owned oil companies and national oil companies.

As similar joint ventures between private and government-run oil companies have been repeated around the world, they’ve led to ever greater economies of scale, prompting mergers among the major oil companies. In 1998, bpacquired Amoco and shortly thereafter, Arco. Then Exxon and Mobil merged. (At the conclusion of the deal, Mobil’s Chairman Lou Noto was asked a question about Arco, which Mobil had earlier tried to acquire for itself. He replied, “I’ll tell you what my mother told me — that you never talk about your old flames on the day you announce your engagement.”)

In France, Total merged with the other domestic major, elf. Finance Minister Dominique Strauss-Kahn said that allowing either French company to merge with a non-French company would have been “un suicide politique.” Soon, Chevron combined with Texaco, and Conoco merged with Phillips. The only major that remains a standalone is Royal Dutch Shell.

Actually, all these private companies are “majors” only in a relative sense. They’re also called “international oil companies,” in contrast to the “national oil companies” such as Saudi Aramco, nioc (Iran) Gazprom (Russia), gqpc (Qatar), inoc (Iraq), pdvsa (Venezuela), and others. The smallest of these nationals has nearly ten times the oil reserves of the largest international, Exxon; even measured by annual production, only Exxon and bprank with the nationals. As Yergin writes, “the central rationale of these mergers was not about refining and marketing — the downstream — in the United States. It was about the global upstream — exploration and production of oil and gas around the world.”

The national oil companies of the Middle East, which share such close identities with the states that own them, have been analyzed thoroughly in The Prize. Here Yergin takes a closer look at many that are located elsewhere. Foremost among the new Petro-states is Venezuela, where Hugo Chavez’s rise to power closely paralleled the rise in the world price of oil and would likely not have occurred without it. Then there is Nigeria; the tale of how it has squandered its oil wealth and simultaneously been corrupted by it is chilling. And Iraq, whose war story Yergin partially retells here, shows an emphasis on oil often missing in other renditions.

However, the biggest changes in the international oil market have not been on the supply side, but on the demand side. Here Yergin’s focus shifts to China. Between 1980 and 2000, the demand for oil had risen everywhere, but the developed countries were still using two-thirds of that total. By 2010, the split between the developed and the developing world was more nearly 50-50.

The pivotal year for the dramatic change in that trend line was 2004. At an opec meeting in Algiers, the consensus expectation had been for oil to continue to be about $22 to $28a barrel. Fearing a repeat of the falling prices in the previous decade, Saudi Petroleum Minister Ali al-Naimi sought a production cut. Soon after the meeting, al-Naimi went to China and quickly saw that China’s consumption, growing at about sixteen percent a year, wasn’t about to slow down. Rather than a production cut, al-Naimi called for an increase.

China’s hunger for oil, combined with its centralized political system, led to a new kind of oil company, a hybrid that was neither the international private major like Exxon or Shell or the state-run Saudi Aramco. China’s three big oil companies are in the business of seeking oil everywhere in the world, as are U.S. and European companies, but they’re still fundamentally state-run.

The geopolitics of China’s worldwide search for oil became more ominous when one of its companies — the China National Offshore Oil Corporation, cnooc — locked horns with Chevron over the acquisition of Unocal. Chevron, with considerable backing from the U.S. government, finally prevailed, paying $17.3 billion. However, that whole incident may be less indicative of future events than is the fact that Chevron and cnoochave since teamed up to explore for oil off the Chinese coast. Although China is itself poor in oil, it has become, in Yergin’s words, “the single most rapidly changing element in the global oil market.”

At this point the focus of The Quest shifts to energy security. Despite Yergin’s disdain for the peak-oil pessimists, he agrees that supply will be increasingly dependent on unconventional sources — deepwater offshore drilling, tar sands, and shale. One chapter is also devoted to the dramatic rise in the production of natural gas from shale; Yergin notes that the same techniques — horizontal drilling and hydraulic fracturing — are now being applied to shale oil as well, although with nowhere near the pace of new production.

For Yergin, energy security has little to do with “energy independence,” however the latter may be defined. He believes it is utterly unrealistic to try to develop a domestic energy supply sufficiently abundant to be decoupled from the rest of the world. Rather, security emanates from diversity of supply. (This was also how Winston Churchill saw it a hundred years ago, when he successfully advocated converting the British navy from coal to oil, despite the fact that Britain possessed lots of the former and almost none of the latter.) The West has habitually feared over-dependency on the volatile Middle East for oil, but attempts to diversify the sources of supply have borne some fruit: Even though opec produces more oil than ever, its world market share is much less than it was in the 1970s.

But neither the West, nor any other industrialized region, can depend on abundant supplies of oil indefinitely. Thus, Yergin proceeds to look at other forms of energy. The Questranges over topics as disparate as the origins of the electric age, the birth and maturity of nuclear energy, the development of a consensus — both political and scientific — regarding man-made global warming, the possibilities of bringing both solar and windpower to utility scale, the electric car, and the importance of conservation. Yergin provides interesting detail on all of these subjects, especially so on global warming, to which he devotes six chapters.

But this broad-ranging study of the whole energy universe doesn’t entirely mesh with the first half of the book. If Yergin’s intent is to depict the entire world of energy in an encyclopedic fashion, there’s the question of proportion: Why half to oil and half to everything else? That’s like writing a book about Europe in which half the coverage is France, with the balance split among the rest of the continent. Only Francophiles would be pleased.

Perhaps this is a mere quibble, but it raises a more serious problem. Yergin does subscribe to a scenario in which oil will become significantly scarcer. He suggests there are other forms of energy which, in the meantime, will have ample opportunity to scale up — or, in the case of coal, possibly to become “cleaner” by means of carbon sequestration. But that still leaves a key question mostly unanswered: How will any of these energy sources work as transportation fuel, which is, after all, oil’s primary use?

Yergin certainly doesn’t believe that the gap can be filled by means of biofuel. After cursorily reviewing corn, sugar, switchgrass, and algae as fuel feedstocks, he points to the possibility of a “breathtaking . . . future in which hydrocarbons give way, increasingly, to carbohydrates and other biological sources of energy.” That optimistic scenario is ascribed to Steven Koonin, a former bpchief scientist and currently an undersecretary at the Department of Energy. But how much of the global motor fuel demand does Koonin say could eventually be provided by biofuels in an environmentally responsible manner? Only twenty percent.

There is also the fuel cell, and The Questdevotes several paragraphs to this possibility, but without much conviction that the device will be a viable alternative. Natural gas vehicles, on the other hand, are certainly feasible — in a few countries they’re already a major part of the fleet. But natural gas is still oil’s first cousin, and more of a tactical than a strategic departure from gasoline.

Which brings Yergin to what he calls “The Great Electric Car Experiment.” In the last 30 years, there’s been significant progress in batteries’ ability to store energy. The lithium battery was actually pioneered in Exxon’s laboratories in the 1970s, when the rising price of oil looked unstoppable. Although Exxon lost interest in the automotive possibilities as soon as oil prices began to retreat, almost every major automobile company is now in the game.

The improvements in battery efficiency along with further developments of other alternatives to gasoline powered vehicles have led Yergin to write that “oil’s almost total domination over transportation will either be whittled away or more drastically reduced.” But does Yergin see the evidence for this, or is he just optimistically saying that somehow the necessary breakthroughs will yet occur?

There is also the fuel cell, and The Quest devotes several paragraphs to this possibility, but without much conviction that the device will be a viable alternative. Natural gas vehicles, though, are certainly feasible.

In The Prize it was sufficient to concentrate on history and on the present. But a book called The Quest, with the subtitle Energy, Security, and the Remaking of the Modern World, could have been more forward-looking. Yergin clearly addresses the efficiency limits of the lithium-ion battery but barely hints at possible further improvements in battery technology, even those that appear reasonably near at hand. For example, he might have explored or at least acknowledged the current research at the Massachusetts Institute of Technology, where work is proceeding on semi-solid flow technology. If successful, this process will result in commercially useful batteries with a much higher energy density than lithium-ion; (because of mit’s location, the technology has been nicknamed “Cambridge Crude”). Research with similar aims is underway at Stanford, the University of Michigan, and universities and technology clusters throughout the country.

To be sure, some of this r&d will need government funding and perhaps other subsidies well into the production stage. Daniel Yergin, with his prestige and authority in energy matters, might be just the person to write a follow-up volume exploring which technologies should or should not be candidates for such funding, and how we might remove enough of the parochial politics from the process to prevent the kind of feckless giveaways that have become so common in the alternative energy field. Meanwhile, the book that he has written, The Quest,is a valuable contribution and provides keen insight into the contemporary world of energy.