Now the world’s largest natgas exporter, the U.S. has been a key provider of energy security globally. Here’s the overview of current dynamics and the outlook from the deep perspective of a leader in energy investing and geopolitics.
Nissa Darbonne, Executive Editor-at-Large, Hart Energy
Ken Hersh, President & CEO, George W. Bush Presidential Center and Co-Founder of NGP
Ken Hersh (00:18): If you're looking for an optimistic, upbeat presentation, I suggest you'd find another venue for me anyway, but I'm going to caveat a couple things. Very importantly, the views you're going to hear are my own. These do not represent President Bush. They do not represent the Bush Institute. For those who've heard me speak before, I get opinionated. And so please, if you don't like something you hear, please attribute it to me and not President Bush. Second thing is, I apologize that I go fast but when I get going, I get kind of heated and I get carried away. But I will aim high since this is an audience that already knows the energy industry. And so I'll try to fill in some of the white space.
(1:13): So to start, imagine that we're all on a boat crossing the crossing the Atlantic. This boat took 75 years to build. It's very, very elaborate, very, very complicated. There are no life rafts. The boat starts to leak and it will sink if nothing gets done. Would all of us as the passenger on the boat vote to A. fix the boat or B. vote to start a 50-year process to develop new voting materials that don't leak? That's exactly what's happening today. We are enjoying admiring the problem and coming up with airtight solutions that will do almost nothing to address the problems yet will cost valuable time and resources in the process. For example, this past summer, temperatures hit records. The grids were at the brink. Fires, droughts. Our president announced a 30-GW plan for offshore wind in the United States by 2035 as a solution that amounts to 3% of the electric generation capacity in the United States today, let alone what the demand will be in 2035.
(2:16): In the last 20 years, we spent $3 trillion on renewable power. $3 trillion. 20 years ago, fossil fuels generated 82% of global energy supply needs, before COVID and before the Russia-Ukraine situation. Congratulations. Fossil fuels had an 84% market share after $3 trillion in 20 years spent. If we had committed that $3 trillion to things like adaptation, we'd be about done by now, but more about that later. We are presenting the wrong answers to the right questions and for forcing the energy equation into direct conflict with other geopolitical and economic dynamics. Make no mistake, blackouts shortages and the spikes in the EU right now on prices are manmade problems. There's enough supply of everything on this planet to meet the world's energy needs, to do it cleanly and reliably while managing the dollars to adapt to climate change. If we act smart and are realistic, we can get the job done.
(3:19): But this is no time for dreamers. That time has passed. So how did we get here? First, a little background: we ran a play over the last 50 years. The play didn't work. We ran the play that two countries with McDonald's wouldn't fight each other. We ran the play that if you have global economic interdependencies, supply chains, energy chains, you name it, that would bring lasting peace. After the war came, the wall came down. That looked like a good bet. Students traveled. We all traveled. We started pushing the resources to the logical production place, and everything looked great. Unfortunately, integrated trade, integrated supply chain, integrated capital markets, integrated people underestimated the cultural threats that would not be tolerated by the Chinese sphere of influence and the Russian sphere of influence, and we're dealing with that now. There was before this, there was an outsourced world.
(4:20): Think about Europe. It outsourced economic structure to Brussels. It outsourced its energy to Russia, it outsourced its defense to the United States and it's outsourced its customers to China. And they entered into a system that requires 27 countries to unanimously agree to change it. And that includes disparate countries from Northern Europe and Southern Europe. Now we're at a point where the benefits of globalization helped people unevenly, and you do that for long enough, and populism is, and isolationism is what happens. The multilateral institutions that were designed to address the issues coming out of World War II were not effective, and they're no longer effective. First by design, the U.N. itself was meant to keep Japan and Germany from re-arming and causing trouble. Again, China and Russia have veto power on the security council, and Japan and Germany, two of our most democratic and staunchest allies, do not have permanent seats on the security council.
(5:29): It is structurally flawed. The WTO didn't help trade. The U.N. did nothing to advance human rights. The U.N. for the climate hasn't worked, and the World Health Organization didn't prevent pandemics or make them less bad. While incumbents use those institutions to feather their own nest, generally speaking. So now there are three forces at play today. The first is a massive decoupling, and it's not just decoupling implying two spheres. There are three spheres, and it's being done when the central banks around the world are synchronized in their motivation to raise rates. This is a stagflationary environment, make no mistake. And we are moving from a single polar world to a multipolar world as three spheres: the Chinese sphere of influence, the U.S. sphere of influence and the Russian sphere of influence start to divide the various forces on the planet. The second is technology, and it's a battle between the disruptive forces that are deconstructing authority versus those forces trying to contain it.
(6:35): Things like AI [artificial intelligence], quantum computing, genomics, they're all threatening established institutions in our country. We love the conveniences of them, and we're very schizophrenic. We love the conveniences and the empowerment of technology, but we haven't quite figured out what to do with the privacy and polarization that it requires. In other parts of the world, technology is going to be the greatest asset to authoritarian regimes, and whereas internet 1.0 brought us the Arab Spring, the internet 2.0 is demonstrated by China, has demonstrated the ability for a tool for very small numbers of people to control literally billions of people. And the world is figuring all this out and it is still unsettled. The third force is obviously what's happening on the climate and all of this BA has led to a battlefield in the energy, where the energy industry is that battlefield pitting different priorities against each other in the age of geopolitical, calm and abundant supply, which was the era of the U.S. dominating being the true superpower.
(7:44): In the Shale Revolution, energy independence calls kind of subsided. And instead, we no longer were focused on domestic. We wanted cheap, plentiful and reliable energy, which was fine. Then we added “clean” to the priority list. Now I can give you a clean, but it may not be cheap. I can give you clean, it may not be reliable. I can give you reliable, but it may not be clean. All of a sudden, we had some problems. Intermittency is obvious and we underinvested domestically, but the world was calm and it masked what was really going on. We basically slept, walked into a crisis. The world population has gone from 6 billion in 1998 to 8 billion people in 2020. Think about that. 33% move took mankind millions of years to get to a couple billion people. And in the last a hundred years, we've gone to eight. The U.S. population has grown from 275 million to 330 million people since 1998.
(8:42): That's 55 million people in a bull market with relative calm. And we all have three or four or five devices, and we all live in nice homes. The average American home has grown. So you combine all of those forces and you get to really an insatiable demand. Growth for energy. Reliable was – is – something that we don't value until it's gone, and that's where the sleepwalking happens. We were building reliance on bad partners. None of us in our private deals, none of us would do a deal with a bad partner. If we do, we go back and regret it later. Yet, that's exactly what we were doing by outsourcing everything around the world, especially to places like Russia and China. The EU did this with respect to oil and gas from Russia. The U.S. renewable industry has done it from China. We get 80% of our rare earths from China, and there's many more examples.
(9:40): As a result, we were really under investing here at home. Yet we all know that capital is what's needed to keep this going. The energy transition is no panacea. The geopolitics of the energy transition are no better than fossil fuels. In fact, in some ways they're worse. The top three oil producers produce only 35% of world supply. The top three minerals producers produce 80%, and China is the dominant player. The rare earths that we need for the transition are not in the right places. Lithium, 90% of the world's lithium processing comes from China. 80% of the world's graphite comes from China. 70% of the world's cobalt comes from the Democratic Republic of Congo, which is neither democratic nor republic, but it is the Congo. Russia, Philippines and Indonesia control 65% of the nickel market. China, Peru and Chile are 55% of the copper market and 40% of the world's uranium supply comes from Kazakhstan.
(10:40): And Russia has 45% of the enrichment capability for nuclear power on the planet. I don't know how that's going to shake out, but it's not going to shake out easily. The energy transition is not easy at all for those reasons. Importantly, demand is going to skyrocket to hit the targets that the IEA has suggested. For electrification, lithium demand would have to grow 40 times what it is today. Graphite, cobalt and nickel, 20 to 25 times; copper, two times, all by 2040 if the Paris goals are met. Now, of course, the Paris goals have not a prayer of being met. The problem is, is that a lithium mining takes about 10 years from start to first production. Nickel takes 15 to 20 years from start to first production. Copper takes about 15 years, and that's after all the NIMBY protests. Unless we started yesterday, there's no way we're going to meet the targets by 2040.
(11:39): Thirdly, the energy transition isn't necessarily that clean. The IEA estimates that emissions from rare earths through the entire mining value chain wipe out the emission savings from an electric vehicle. It's not cheap. Full mining and minerals development is very expensive, and we haven't even accounted for the back end of what happens when we have to dispose of several hundred million batteries and all those sorts of things. According to McKinsey, for the world to get to net zero by 2050, it would require $6 trillion in new spending globally every year for 30 years. That's a one-third of every tax receipt of every government in the world. Absolutely impossible. So finally, it ain't going to happen. And I hate to be the bearer of bad news, but it is not going to happen. Fossil fuels will still dominate. The EIA estimates that global energy demand will grow by 50% between now and 2050 based simply on the world population.
(12:35): Fossil fuels will be 75% of global energy demand. Internal combustion engine cars are not going anywhere in our lifetime. Electric vehicles are really nice. They're fun to drive. Buy one because you want one, don't buy one because you think you're doing good for the planet. Today they're about 15 million electric vehicles on the car, on the road, in the world, in the world, and that compares to 1.3 billion internal combustion engine cars and lights trucks on the world. It is staggering how few people focus on the numbers, yet electric vehicles on the road will grow by tenfold. That's really awesome. From 15 million to 150 million. And at the same time, the 1.3 billion internal combustion engines will go to 1.6. So we'll add about 300 million internal combustion engine cars by 2035, despite adding maybe a hundred. Even if you look at the crazy numbers, 200 million electric vehicles, it still won't matter.
(13:38): Electrifying everything makes no sense. Absent a massive commitment to nuclear power, which we obviously haven't done, we will bump up against capacity limits for world rare earths natural gas grid capacity guaranteeing us higher prices and intermittency, and this is regulation agnostic. It is regulation agnostic. California has blackouts and brownouts today, and so does Texas, and one is one of the most massively regulated and one is deregulated. This is not the regulators at fault. It's based on faulty assumptions. First, the world isn't seamless. The charts we saw in the prior speaker, especially the hydrogen numbers, that looks great when everything's just seamless. Unfortunately, reality has a way of getting in trouble in place of the theory. Russia invaded, the invasion shows that when you do business with a bad partner, it's only a matter of time. How many more lessons do we need about doing business with bad partners?
(14:42): And as I said, on the rare earth side, we're playing with the same fire. And the second thing is change happens. Policy assumes that trends will always, today's trends will always continue. Geopolitical realities have a way of changing faster than established institutions. There's an election cycle here every two years. Do you honestly think – honestly think – that our Congress, with its 18-month visibility and incentive structure can focus on a problem that's a 30 year problem? The result is the world is reordering priorities on its own. First we're revaluing reliable over clean. Okay, keep my lights on please. I'll worry about clean later. Nothing more is emblematic than what's happening in Europe today. Germany's burning more coal than ever before. In fact, this year may be one of the highest burning coal tonnage years in human history. Okay, let that sink in. After $3 trillion renewable energy, the only 1% of people in this country put climate change as a top issue.
(15:47): Natural gas is going to be viewed as green, and it is starting to again. And then California is not turning off their last nuclear reactor. And Japan is returning to nuclear. Even after Fukushima, our administration is caught between the progressive agenda and reality. We've seen overtures to Venezuela about producing more oil. We've seen President Biden traveled to Saudi Arabia to make nice. We've seen the Biden administration feverishly work on resurrecting the Iranian deal. That doesn't look like it's going to happen yet. President Biden never visited Midland, Texas, which the United States is now the largest oil producer in the world. But for the natural gas industry, the United States would not have met the decline in emissions targets that we've already achieved. I want everybody to remember – and everybody can repeat this because we all need to be evangelical about this – that fossil fuels did not take a livable climate and make it inhospitable.
(16:48): Fossil fuels took an inhospitable climate and made it livable. Without fossil fuels, we'd all last about 72 hours out there. And so it's not to be taken lightly that the energy transition is something that should be taken seriously. Now, where will we go from here? Okay, this is not good news. Where will we go first? We're doubling down our renewables. We're back to the lifeboat, the boat with no life raft, and we're doubling down on the 50 year plan instead of the “let's save ourselves” plan. Germany has said they're going to dramatically increase solar generation. It's not a sunny country. Germany has less days of sunlight. In New Jersey, the U.S. Inflation Reduction Act, $370 billion for green credits. It's like telling a patient that's having a heart attack to please leave the ER and go start a vegan diet. Electrification is not the answer, obviously, to every question.
(17:43): Even central banks are now adding climate change as their new focus, as a new focus area, totally baking in. Baking in an exogenous factor to divert attention from the goal of economic stability. Yet the rich countries, we've empirically proven that the rich countries are able to weather the storm better than the poor countries. So I want my federal reserve making sure that we're economically healthy. I want my Department of Defense keeping me safe. I don't want my department – let the EPA [Environmental Protection Agency] worry about my environment. I want my defense department to keep me safe. I want my federal reserve to keep our economy stable. Those are the wrong places, and we're raising the cost of energy in the process, which is a regressive tax while not helping the environment at the end. Today, 125 million people in Europe live in energy poverty. Yet Europe has been the leader in energy transition.
(18:31): We are forcing the energy de-globalization around the same forces of decoupling. The governments are not done with the energy markets, and this is the greatest risk. The greatest risk. The energy markets today are now seen above ground. You have people, you have governments trying to force prices, nationalized suppliers, windfall profits, tax on producers, taxes, penalizing certain sources, inflating others. Export controls may be quotas, maybe tariffs. The last time we saw this much intervention was in the 1970s where we had price controls, import quotas, government allocations, and the result was fivefold increase in prices and massive shortages. There is no way that this will be coordinated because we have consumer-dominated countries, and we have producer-dominated countries. And there's also internally in this country, there's no way, even with the Inflation Reduction Act that all of that can work without coordination at the federal, state, county and local level.
(19:23): When was the last time we were able to get 50 states to agree all the way down to the local level? I don't see it. And that's unfortunately what we need. We're serving different masters. Consumers and producers serve different masters, and we get it wrong when we get it wrong. It has serious unintended consequences. There'll be more mistakes. It won't be smooth. And when you're dealing with electricity or energy, mistakes hurt people. And we've seen that. We've obviously with blackouts, etc., the recent California electrification of homes by the year 2030 is going to be a disaster if it happens at all. There'll be more political backlash. Make no mistake that high energy and high food prices change governments. We've started to see it. We've seen it in protests in the U.K., France, Spain, Italy, Portugal, Indonesia, Chile. Several of those have changed. Their governments have changed because they've been protesting rising energy prices, and that's code for clean.
(20:22): Sri Lanka just had a massive change because of inflation. And that was brought about because their energy and food situation. So Europe's answer is going to be to cap natural gas prices and somehow nationalize and socialize the losses that come from that. And that's okay until the moment that they can't. So what does that mean? It means we're going to get selfish again. We're not going to be coordinated. We're going to focus on every country for themselves geopolitically. That's in our best interest. It is not in our best interest to be green at all costs. And we will see that populations will get fatigued or they will vote to change. We will soon all realize that China dominates the clean energy value supply chain. And we'll also realize that we're hurting our economy while now not helping the environment. I don't know how long it's going to take for people to see the next disaster and say, wait a minute. Time out.
(21:18): We've been talking about this for a long time, and we've actually been spending money on this a long time. Why has nothing been done or not? Why has nothing been done? Why are we not having the results? So in the short term, the winners are going to be the natural gas producers. They're going to be U.S. producers in general, the coal producers in the medium term. I'm going to predict that we're going to see a resurgence in natural gas and nuclear power. That's going to be the single biggest positive that's coming out of all this noise: the losers. The first loser is Russia. Russia has the energy transition away from itself, okay? If you are essentially a natural resources economy, you want to make sure that your customers are happy, and they've just embargoed themselves. They've just sanctioned themselves. And so now it's going to be very, very painful for the next couple of winters.
(22:09): But in effect, they've just hastened the transition away from them. It'll be messy. Its industry with high energy inputs, aluminum fertilizer, petrochemicals are all going to have to readjust. Consumers are going to have to readjust. Raising energy prices is a regressive tax. And then politicians are going to find that the situation is completely unsustainable. And that's where the big existential threat to institutions are. Now, where should we go from here? First, make no mistake. We should continue to be more gentle on the planet. We're going to go from 8 billion people to 9 billion people. And that's something that we need to accommodate in order to do it peacefully. However, it is time to realize that our goals on climate are not going to be met in time. There are too many geopolitical, economic and physical roadblocks. We can't fee out the laws of chemistry and physics as much as we like to think we can.
(23:10): We should focus on more domestic production in the United States because we have better environmental records than places like Venezuela. It is insanity. It is insanity that we're not seeing our entire fossil fuel industry in the United States as a bridge. That should be one of the evangelical things that we all need to be talking about. Second is a big commitment to nuclear power. And the third is a big commitment to climate adaptation. Human beings are incredibly resilient. They're incredibly adaptive creatures. We need to unleash human ingenuity while we adapt to climate change and conduct R&D on leapfrog energy technologies like scalable, renewable energy, nuclear power, geoengineering to make the oceans work harder and direct carbon capture, things like that. We should not be working on the small little things that are going to increase our problems. Renewables, where they're competitive without subsidies, make a lot of sense.
(24:04): If green tech is cost effective, then we shouldn't need all the subsidies. But unfortunately we keep going back to that serve, that same master. Adaptation is a much better bet. Think about it; there's a plan called the Lower Manhattan Coastal Resiliency Plan. For less than 10, 25 years, you can fortify lower Manhattan. The hundred-year flood has now become the 20-year flood. And the government's own estimates show that the 20-year flood has water going all the way up to City Hall. Okay? I mean, they're really scary. If you go to the NOA website and look at these things, it's really scary. It it's only money and time, and we're wasting both in the U.S. Water is much more of a precious commodity that we should be focused on. It is crazy that we're not running nuclear power plants in California to run decal plants.
(24:53): Took 25 years for the decal plant and it got nowhere. Got nowhere. All of a sudden, out of necessity, now of a sudden they're talking about it. Of course, that's a 15-year construction project. So then it's time to get our priorities straight. The Inflation Reduction Act shows where our priorities are $370 billion over 10 years, all full of incentives for solar and wind and EV [electric vehicle] chargers, etc. However, it requires that 80% of the minerals in those products come from domestic or fair trade countries. Today, that number is half that, and it has to be done by 2026. Given what I said about mines, there's no way yet in the bill there were $2.6 billion. So $370 billion headline number for renewables, $2.6 billion for coastal protection and restoration, seven tenths of 1%. Okay? Those numbers should be 50:50, not 99:1. And Senator Sinema held it up for an additional $4 billion for drought relief in Arizona.
(25:59): So she had to pull every string she could to get a little more adaptation in there. So congratulations. Less than 2% of this bill is for adaptive strategies, and 98% is for things that will make us feel better but do practically nothing for the environment. We need smart government policy that harnesses market power, not retards it. The energy markets are larger than governments, and they will dwarf the politicians if they let it. We need infrastructure to be easier. We need approvals to be faster, and we need to be focused on the smart things. We are a lot smarter than we're acting, and it is time that we not think about bankrupting ourselves in the name of making us feel good, but that we actually propose real solutions that have real chances of success and hit the problem at its heart. We need to get together and fix the boat so we can finish the journey and be well enough off at the end to develop new materials that the next boat won't leak.
Nissa Darbonne (27:06): I'm always loathed to ask this question, but the second half of this year in particular, it has to be asked, and that is, are we at risk of a global financial crisis? Maybe one even more so than what we saw in 2008.
KH (27:37): Predicting a global financial crisis is a very tricky question. First of all absent of really major exogenous thing like a nuclear weapon going off in a crazy place there isn't as much leverage in the system as there was in 2007, 2008. And there isn't the massive derivative compounding bets that are being made that when the mortgage crisis hit, there was so much financial leverage in the system. The banks were on more leverage, and then you had this massive notional amount of derivatives in the mortgage market that was something like 10 or 15 x, the actual market itself. So that were not in that situation. Sovereign balance sheets are not that great but personal balance sheets are better. So really, I don't think that we're going to have a global financial crisis absent a big exogenous event. However, what's going to happen is that it's just the only thing can change is the denominator, which is standard of living and quality of life.
(28:46): So if all of a sudden you're in an energy poverty where you don't have 24 hours of energy, you're going to change your behavior, you're going to change your industry, your economy's going to change. If just like we're seeing in the United States, we don't have full labor markets. You go to a restaurant, you deal with less service. It's just the way it is. And imagine that in every industry across the whole economy. So that's what I think is the greater threat. But this decoupling is not don't take that lightly instead of offshoring it's friend shoring. It's making sure that your supply chains come from, even if they're higher costs come from countries or places that are friendly. And that unwinding is, I think is healthy, but it's expensive.
ND (29:32): And you mentioned protest and France on and so forth. It reminds me of the yellow vests and the concern that that could spread throughout Europe and also elsewhere as well. Are we at risk of a collapse of world order?
KH (29:46): Oh I am generally bullish on democracy and freedom. And the United States and Europe comprise about 45% of global GDP. That is big, is hard to refute. So China and Russia are playing their games and those games require order. So for rare world order to break down it has to be a wholesale collapse. In institutions I don't see that happening. And so again, absent a really massive escalation in the Ukraine and that then all bets are off. But we'll see. I don't think, I think that the institutions are, I think the institutions around the world are going to hold. It's just a question they need to be reformed. I made the points about the U.N. U.N. by design was built to solve a different problem than we had. I've read the U.N. charter. It doesn't say, please fix my climate. It doesn't. But yet we're using it to fix climate.
(31:12): Well, 196 countries couldn't agree to what to have for breakfast tomorrow yet. We've spent 25 years of great meetings in Kyoto and Rio and Copenhagen and all these really fancy places to get 196 countries to agree when we don't need 196 countries to agree, you need the top four. The top four emitters. Admit 60% of the world to emissions Zambia can produce, can they want electricity, do whatever you want. They don't matter to the climate. It's the U.S. and China and secondarily, India and Russia and places like in South Africa. I mean, those are places that we should have been focused. Instead, we were playing this Cuba game because that was the institutional arrangement that we were using. So I think we need to learn and we just need to be smarter.
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