Vijay Vaitheeswaran: You have been on an energy policy discussion tour of the US, trying to take the pulse of the country. What motivated you to visit 50 cities?

John Hofmeister: After Hurricanes Katrina and Rita, refinery production in the Gulf of Mexico and on shore was shut down, the nation lost 25 percent of its supply of daily oil and gas, and some 90 platforms just disappeared. The nation was struggling, and, because the market rations oil and gas according to supply versus demand, the price went up. We were being pummeled as villains. I had just gotten a letter from a customer that was just a drawing of yours truly hanging from the branch of a tall tree by the neck. I said, "We can continue living in a bunker, or we can go out and meet the people who are so upset." We decided we would do town halls across the country, which for us meant 100 people in a room and 10 chairs, a real town hall where we stood shoulder to shoulder, eyeball to eyeball, myself and ultimately 250 other executives who joined me from coast to coast. We called it a "National Dialogue on Energy Security."

VV: What did you learn that surprised you?

JH: We learned that there are some serious myths in people's minds about energy — for instance, that we are running out of oil. Another myth is that we control the price of crude oil. When a company like Shell produces about 3 percent of the daily global production, it's hard to have an impact. When you add up Exxon, Shell, BP, Chevron, Conoco, and Total, you don't even get to 15 percent of daily production. So how in the world do these five or six companies control prices? Another myth is that there is a silver bullet just awaiting technical research that will solve all our energy needs.

John Hofmeister is interviewed by Vijay Vaitheeswaran at a CEO Series event held at NYU Stern in April.

VV: Tell us why you think that Hubbert's "peak oil" theory — that is, that global production could max out and the world could run out of oil — is not the right way to look at the problem.

JH: If we just start with the US, the scarcity of crude oil in the US is purely a result of public policy. Believe it or not, there has been a 30-year moratorium on East or West Coast drilling or Eastern Gulf of Mexico drilling. For 30 years, the public policy has been "don't drill here, go somewhere else." That policy was formed when oil was about $7 a barrel. But technology has moved on and the price has moved up, and now it is a public absurdity to deny drilling to the nation that needs it the most — the US.

VV: So, your argument is that as far as the US is concerned, regulation is a major impediment to the resources that exist?

JH: Yes, for conventional oil and gas. The theory that there will be oil scarcity is predicated on a set of narrow assumptions that never imagined deep water exploration or public policy constraints. It was predicated on what was known at the time in terms of the geophysics of oil back in the 1950s. The fact that it happened to be correct — about US production peaking between 1965 and 1970 — was coincidental. I believe we are still adding to the resource base of the world by new discoveries, finds, and exploration. I think we will only peak because we will prefer other forms of energy and, therefore, will not demand as much oil.

VV: If the regulations were removed or eased, is there enough oil on US soil or offshore to eliminate the needs for imports?

JH: Probably not. The US today produces about 7 million barrels, and we consume 21 million.

VV: So, doesn't this argue for an energy interdependence — rather than independence — model?

JH: I think energy independence is a crock. The world is interdependent. To think that we somehow as the United States of America can declare energy independence is nothing but pandering for votes, and I have said that to many elected officials. We want interdependence because it's a check on the global system. We want to have some voice in what happens elsewhere in the world. That is part of international trading. Another aspect is that we can flip this oil price on its head if the US could say to the world that we are going to open access to more areas — not 100 percent access, but how about half of the 85 percent of the outer continental shelf in the lower 48 states that's off limits?

"Think about what it would say to the world trading system if America put a plan together to produce three million more barrels per day, taking our seven-plus million barrels up to 10-plus million barrels — over half the US supply. With biofuel and other alternative fuels, we could say to the OPEC cartel, 'We don't need you as much as we did before.'"

VV: Can we really drill our way to a solution? Department of Energy figures suggest that the US has less than 5 percent of the world's remaining reserves of conventional oil. The Persian Gulf has almost two-thirds.

JH: Think of the next 10 or 20 years. Five percent is a lot. It will take a long time to produce 100 billion barrels.

VV: It's not the most economic oil, though. It's cheaper in other parts of the world.

JH: All of the off-limits oil could probably be produced for less than $50 a barrel. Think about what it would say to the world trading system if America put a plan together to produce three million more barrels per day, taking our seven-plus million barrels up to 10-plus million barrels — over half the US supply. With biofuel and other alternative fuels, we could say to the OPEC cartel, "We don't need you as much as we did before." That would immediately reduce a lot of the speculation. It would ease the geopolitical tension, which is inflating the price as we speak.

VV: Is relatively expensive domestic oil really a contender compared to the alternatives that are being developed?

JH: The answer will be a multiplicity of energy sources, including the somewhat more expensive American-produced oil. If this nation created a comprehensive national energy security strategy that dealt simultaneously with the supply side, via the technology to produce more oil and clean coal, for example, and also dealt with the demand side, via increased efficiency and use of clean energy or alternative energy, and if we dealt with the CO2 issue, we could enhance oil recovery in many abandoned or existing fields that would produce more domestic oil at a fairly reasonable cost. Affordable, cleaner energy should be the goal. Let's face it: Alternative energy, whether wind farms, solar, hydrogen, or coal gasification, is not cheap.

VV: Are we in an era of permanently higher oil prices?

JH: I think it's still cyclical. The current cycle of high energy costs is unprecedented. But also, today's technologies demand hydrocarbon infrastructure. We don't have many mobility choices. Detroit is tired of having 99 percent of its product based on hydrocarbon.

VV: Shell is a member of the US Climate Action Partnership, an association to promote federal legislation on capping CO2 emissions in this country and using a trading system to provide incentives to find new technologies and ways of doing things to reduce CO2. Why join an organization that lobbies government for a regulation that would potentially impose costs on you and reduce your sales?

JH: We believe man-made greenhouse gases are not good for the world and that we, as a major producer of greenhouse gases, have a social responsibility to do something about it. We have reduced our own carbon footprint to below 1990 levels.

VV: If you do this as a company voluntarily acting out of corporate social responsibility or to be a first mover, why do you need a government mandate?

JH: Because it will keep the playing field level.

VV: You are a division of a British-Dutch company, Royal Dutch Shell. Does your being an international player influence how you look at the world, compared to some American oil companies that are very much American in their roots?

JH: There are influences that affect how we see the US. For instance, we would welcome more diesel engines in the US. We are part of the European change process where we see more miles per gallon, less emissions, less CO2 in the atmosphere in Europe with the dieselization of the European fleet. On the other hand, some of the innovation in technology, the deep water work that we do, really started in the US.

 

AUDIENCE QUESTIONS

Q: Any major executive of an oil company acknowledging the "peak oil" concept immediately drives up all the costs of production for his company and, most important, the costs of any acquisition target, thereby hurting his shareholders, including widows and orphans. Yet not to acknowledge "peak oil" also causes the country and the world as a whole to look at policy prescriptions that may be radically different from what is really required. I was wondering how you would resolve this dilemma.

JH: We don't advocate at Shell that there is "peak oil" at this stage. We believe there will be at some point, but we believe there are enough resources that we should be out producing those resources. There is more than enough financial capability but not enough human capability on earth to over-produce, which is keeping the price up. We can't build infrastructure fast enough to exceed global demand unless demand falls enough to enable us to catch up.

Q: To what extent is the desire for well-functioning global markets affecting US foreign policy, especially in regard to Saudi Arabia and Iraq?

JH: I do think that because US public policy has been so flawed, the US has added to international tension by having such a heavy dependence on imports. Whether that is deliberate or whether that is an outcome of just avoiding our domestic problem of trying to produce more oil, the consequence is that we contribute to geopolitical tension.

Q: Regarding the US cap on CO2 emissions, one of the interesting components of that is that legislation rewards early actors in terms of the proposed regulation. Was Shell a part of crafting that part of the agreement?

JH: Absolutely. First mover is always a nice place to be.