Atlantic Council Energy Forum Podcast Transcript

Andrew:
Thank you so much and great to be here today, on what I believe would be the last panel of the Trump administration. You are now experiencing the last panel of the Trump administration, possibly anywhere in the world, but certainly here on today's global energy forum. We most definitely we'll stick to our time allotment, because there are some much more important speeches, even though we have tremendous speakers on this panel to listen to afterwards. I want to welcome you to America and The World Energy and Security. I am joined by a powerhouse packed smart panel, much smarter than I, and I'll introduce them now. Helima Croft, Head of Commodity Strategy at RBC Capital Markets. Welcome Helima.

Helima Croft:
Hello.

Andrew:
General David Petraeus, former CIA director, and retired US army general, currently Partner at KKR and Chairman of the KKR Global Institute. Welcome General.

General David Petraeus:
Good to be with you, Andrew. Thanks.

Andrew:
And Dr. Meghan O'Sullivan, former special assistant to president George Bush, deputy national security advisor for Iraq and Afghanistan. And now Kirkpatrick Professor and Director of the Geopolitics of Energy at Harvard university. Welcome Meghan.

Dr. Meghan O'Sullivan:
Good to see you, Andrew. Nice to be here. Thank you.

Andrew:
Great. Let's get into it. Just to refresh on what we're here to discuss. We're talking about the clean energy transition, how it will reshape international energy relationships, create new tensions over resources and infrastructure and new opportunities for collaboration of course. This is all in the backdrop of a tremendously shocking year in the energy markets and the oil market. A price war, undulations in prices, ultimately arriving at pretty much where they began the year, more on that later. But this really presents challenges for the US and a new administration coming into power, how it can best position itself with partners and allies to take a leading role in the global energy market.

Andrew:
What I want to do really quickly is just tee off with a refresher on a piece we published in foreign policy. I'm in the publisher of foreign policy, so I have to cite our content. It's mandatory. Jason Bordoff, who's formerly of Obama's NSC and currently director of Columbia's SIPA school energy center, did a piece in FP, in October, that focused in on the fast transitioning energy market. It was entitled, Everything you think you know about the geopolitics of climate change is wrong. The things that we think we know, and obviously say these facts, BP, the IEA, they're all talking about peak oil. California is talking about banning, not talking about, has banned new gasoline cars for new sale by 2035. China is pledging to achieve carbon neutrality by 2060. Perhaps most importantly, severe weather events like global wildfires and extreme storms are raising public alarms.

Andrew:
I just spoke with our excellent editor, Keith Johnson, energy editor in Madrid, who was still digging out from an Epic two foot snow storm in Madrid. That never happens in Madrid. The backdrop of that is crisis and change. To further site FP content, Chris Murphy, Senator from Connecticut yesterday wrote an FP, that the modern threat to US security is not from rival nation states, rather, it is from propaganda artists, hackers, pandemics obviously, non-state extremist groups, but most importantly and key to this discussion, droughts, storms, rising seas, caused by a rapidly changing climate. These are incredibly important issues and we're going to boil through all of them today. Meghan, I'd like to turn to you first. There has been talk that there will be a new power rising in energy markets electro states.

Andrew:
These are States that are at the forefront of clean energy and might very well replaced oil states in positions of power. China is talked about as one of those clean energy product leaders. Is it accurate that that will ultimately or in the near future, let's say, let's say the near to intermediate term, that they will have more influence and power, or will they lack that same measure of influence, simply because they can't just shut down the flow of clean energy an OPEC cap?

Dr. Meghan O'Sullivan:
Great, thank you, Andrew. Thanks for that introduction and mentioning those two great pieces. In fact, I remember with Jason's piece back in October, did talk about electro states and so have many others. There's so much to comment on, I would say directly to your question about petrostates versus electro states, in the near term or immediate term and during the energy transition. I would say that both are going to continue to have certain amounts of geopolitical power and one may be waxing and one may be waning, but I think we're going to see, this is one of the complexities of this energy transition. We're going to see the geopolitics of oil and gas continue to some extent, because if you look at even the most climate friendly energy scenarios in the future, they all involve a reasonably substantial amount of oil and gas usage over time.

Dr. Meghan O'Sullivan:
Of course, they make assumptions about having carbon capture technology, but no one, again, the most climate friendly scenarios included, none of these scenarios suggests that there will be no oil and gas use in the world. There will be some petrostates that continue to wield influence. In some cases they may wield more influence, because there'll be a smaller number, a finite number of countries that are able to meet the global energy demand at a lower cost and a lower energy submissions. But as you said, electro states will be important, in the sense that not every country is going to be as reliant on fossil fuels to meet their energy needs. Countries like China and hopefully, and I would say with confidence, the United States and others, will have an energy tool at their disposal when it comes to renewable energy technologies, financing for climate, all these other things that countries, which are trying to make an energy transition themselves will need.

Dr. Meghan O'Sullivan:
That will give those countries geopolitical power. I think just very quickly to finish here. One of the things that will be different is, some people talk about our electric grid is going to be like natural gas pipelines. I don't think it'll be exactly the same for the reason that you suggest, that in fact natural gas is a finite resource and a physical commodity, where a lot of renewable energy will be generated closer to home. There'll be less dependence on these long pipelines or LNG networks for energy supplies. And that should increase the energy security of many countries in the end.

Andrew:
And also raising some risks, which we'll come to in a second as well. Helima you're nodding in agreement when we talk about petrostates, perhaps seeing some advantage from the transition. Maybe you could tell us a little bit about that, and why we're going to see that, and also just take us through what happened last year. If oil price were a rollercoaster ride, it's one I don't want to go on a Disney world. Please tell us a little bit about OPECs position now.

Helima Croft:
Sure. Thank you. I think we're really going to see a big divergence in the OPEC producers. But there are certain countries that I think are positioned to handle an energy transition, even a particularly rapid transition. Those are the Gulf producers that have, as Meghan said, the low cost cleanest barrels. There are certain countries like the UAE, that have already made, pretty big advancements in diversifying their economy as well. We had the CEO of Mubadala, yesterday and they've used their sovereign wealth funds to essentially fuel diversification. I think those countries are best place for an energy transition. And again, because they have the greenest cheapest barrels, they will have the biggest share even of a shrinking pie. Then there are other producers, that are higher cost producers, have not done nearly as much on diversification. The countries that Fatih BIROL from the IEA is very, very concerned about.

Helima Croft:
The Nigeria's, the Venezuela's, the Angola's, the Algeria's, Iraq, those are the countries have significant issues in terms of poverty, corruption. Those are the countries that I think are really going to struggle in an energy transition situation. Again, I think it's going to be a very big divergence between the fortunes of producers in this transition. When we think about OPEC, it was absolutely a crazy here. We were together, Andrew, a year ago in Abu Dhabi. We were thinking about potentially having geopolitical risk in the oil markets, driving prices higher, in the wake of the killing of Soleimani. We had had a 2019 year of spectacular attacks on energy infrastructure in the Gulf. In September 14th, we had half of Saudi's oil output temporarily taken offline. When we had discussion last year, we thought more OPEC barrels might be needed, because we were thinking about more supply disruption in the Gulf.

Helima Croft:
Then we obviously had the biggest demand crash ever because of the COVID-19 pandemic. OPEC, I think struggled to have a unified response initially, in part because the information was so fragmentary and there was a certain set of producers that essentially said, let's wait for more time, led by the Russians. And then you had Saudi Arabia, which essentially said early on, we need fast action to stabilize this market. All came to a head in early March, they couldn't reach an agreement. And then we had the onset of essentially this price war led by Saudi Arabia, but between the OPEC producers and Russia. Very, very interesting. I think there also was a real political component to it as well. I think there were certain elements in Russia that were tired of giving financial lifeline to US Shell producers. They were tired of a situation where they would cut production, the US would grow and they would get sanctioned.

Helima Croft:
And so I do think there was a group in Russia that was happy to potentially see prices collapse and potentially see US shell production sidelined. I don't think anybody was expecting any of the producers, the scale of the collapse. And when you had storage quickly filling up, and then you had a real catastrophe in terms of the finances, not only of OPEC producers, but also Shell producers. That's when Donald Trump got involved in essentially helped orchestrate the largest production cut OPEC ever did in the spring. That really played a very significant role in stabilizing the market. And so it was a tremendous year in terms of volatility. It's amazing that we only ended up, down 20%, year on year in terms of demand, but as we go forward into 2021, we're going to be watching to see whether this OPEC unity actually holds together.

Andrew:
Thank you, Helima. That was a great explanation. I can't wait to watch oil 2020, the movie. So much to unpack in there, that I want to pull apart. I also want to remind our participants and attendees, that a year ago when Helima and I were talking about this on a panel in Abu Dhabi, we asked the audience to guess oil price ranges for the end of the year. They basically thought they would be flat, even though they expected retaliation from Iran on oil infrastructure, following Soleimani assassination. And that, by the way is essentially where all prices wound up after plunging into horrible negative territory. So really remarkable. I want to just follow up with a question on Russia. A couple of different follow ups on Russia. First of all, have they demonstrated renewed power over OPEC because of the spat with Saudi? =That's one. Part B, who won? We'll involved General Petraeus with a little bit about Russia and the impact sanctions of that, because they are not a modern and efficient producer also, which is largely the result of sanctions.

Helima Croft:
In terms of OPEC, I think when we had the marriage between OPEC and Russia in 2016, we all thought it was a shotgun threat marriage driven by Shell. We basically kept waiting for this starter marriage to break up, but it is proved to be an enduring alliance. Even after we had the price war in the spring, I think it's remarkable that Russia still is basically sitting at the top of the OPEC plus table with the Saudis. And so while I think the Russians, took a bit of a beating in terms of everyone now looks at their policy and saying, essentially you should have cut in the spring. They have not really lost their co-leadership role in OPEC. I think that's going to be an interesting issue for the incoming Biden administration, because I really do think that the Russians have been able to forge new sets of relationships with producers in the middle East, in Africa, in Latin America. I do think they have been able to use OPEC as a vehicle of soft power expansion.

Andrew:
Did they win the spat with a Saudi? Who came out on top on that?

Helima Croft:
In the end, I think his Royal Highness Prince Abdulaziz was vindicated. He was calling for early action in late January. He wanted an early OPEC meeting to essentially stabilize the markets. And so I do think that his position that they should have come into the market early, I think that was vindicated.

Andrew:
Great. Thank you very much. Fascinating stuff, and we'll come back to that in a moment. General Petraeus, it would be great to involve you at this point in the discussion, especially as we come up with with Russia. First, a general overall question. When we were last together, we were talking about restraint versus intervention. That was at a Quincy Institute event that we had at the Capitol last February. I'd be interested in your view on the US security stance in the world post pandemic. Will the Trump administration's view on foreign intervention impact Biden's policy long term? Do we still have interest to protect a broad? Ultimately Obama and Trump, made it clear that the Gulf oil must flow, but would be interested to hear your view on that today, especially an hour away from a new administration. Hour and a half.

General David Petraeus:
I think if you look at this broadly that we'll see more continuity than change perhaps, that you'll see a continuation of the rebalance to Asia, which really began of course, all the way back in the Obama administration. It carried through this administration. Now renamed the Indo-Pacific. Every indication is that that is going to continue, especially with Kurt Campbell as the coordinator for the Indo-Pacific region and Deputy National Security Advisor, Tony Blinken, Jake Sullivan and others. And they have written about this in that other journal very recently in foreign affairs, which you may see occasionally. There's a very good article by Kurt Campbell, just in recent days, actually, right before he was announced that lays out what will essentially be the components of the US approach to China in particular. And of course it is China, China, China, it is an era of renewed great power rivalries, foremost among them is China.

General David Petraeus:
The US still has national security interest in it still has plenty of national security threats. None of that changes at noon today. Again, you'll see, I think a continuation of a commitment in a variety of different locations around the world. We continue to try to end endless wars, but I know that the incoming administration recognizes that you actually don't end an endless war by ending US involvement in it. You just end US involvement and the war continues. Sometimes if it doesn't go in a right direction, you end up having to go back into it. We have learned that lesson in the past. I think there'll be an attempt to develop a sustainable sustained commitment, focused mostly certainly on the continued threat of Islamist extremism. There certainly are continued challenges from Russia concerns with nuclear, North Korea and the prospect of Iran moving closer toward a nuclear weapon.

General David Petraeus:
And also of course its support for a very dangerous Shia militia in Iraq and Syria, in Lebanon and in Yemen and so forth. And then the cyber threats, you mentioned that very briefly, I think before we came on and how increasingly diabolically clever they are. If you look at the solar winds hack, and it took six to nine months to even realize that they were in there. And of course that discovery was not made by the government. It was made by a commercial firm FireEye. Again, huge number of threats and we still have major interest. And of course, one of those interests is to ensure the free flow of energy from the Gulf to the Pacific and also to the European consumers of that. But noting of course, that, had you asked me about Russia specifically, I was going to observe, as Meghan has written so powerfully about the real impact on Russia actually is not even the recent pandemic induced reduction in demand.

General David Petraeus:
It was the US Shell Gale, which propelled the us from being a very substantial importer of crude oil to now actually a net exporter, very barely, but an exporter and a substantial exporter of natural gas as well. Of course that has dramatically disrupted not just crude oil markets around the world, but essentially also made natural gas global market to varying degrees as well. And you saw the price that Russia was able to charge for gas off a pipeline in Europe, go down to just below the price of Us natural gas plus the cost of liquefaction, transport and regassification. Again, those dynamics all continue here. Again, I think the big difference going forward when it comes to the security approach won't actually be, again, the continued effort to achieve greater balance in the Indo-Pacific and deal with all these other issues.

General David Petraeus:
It's really going to be that all of that is going to be wrapped in a much more comprehensive whole of governments. It's an S on the end of that, because all of our allies and partners are going to be made part of that, to the extent that that is absolutely possible. Again, all of this has been laid out by the incoming members of the administration including, again, in that recent article by Kurt Campbell, that makes that point. I think that's going to be the really big difference, that we are going to be more present once again in various regional, multilateral institutions, international organizations, not just rejoining the Paris climate accord and the WHO, but again, participating more actively.

General David Petraeus:
And also when it comes to a variety of issues involving standards and technology and all the rest. Again, that I think will be the big difference from, it was never truly all America first, but it was much more America first, certainly under the outgoing administration, than we'll be the incoming administration that very much stresses doing all of this, again, together with all the allies and partners we can possibly muster.

Andrew:
Thank you general. I assure you, the Kurt Campbell piece is fantastic and that other publication that you mentioned, and Kurt is fantastic, and a subscriber to foreign policy, I might add. A very smart man indeed, and we are looking forward to him coming into his position and seeing the role that he plays in that position, vis-a-vis on Asia writ large. Meghan, the general reference your writings. We'd love to come back to you now and talk a little bit about that. You wrote on very famously in windfall about the Shell boom. And this was, the incredible rise of Shell and how it changed geopolitics around the world. We've obviously seen, I don't want to say falter, but a view to whether or not that type of pricing behind shell oil production is going to hold. Is that set to peak right now and what will be the implications for the US as a result of that?

Andrew:
When we look through the geopolitics of clean energy, as we were discussing earlier, US certainly in a position of power, but probably not the most robust of all the players around the world, because of that pricing. Obviously natural gas, continue, et cetera. But I'm curious for a little quick revision or an epilogue on where you are on windfall right now in the Shell boom.

Dr. Meghan O'Sullivan:
Sure. Thank you, Andrew. And thanks for mentioning the book. I do think that everything that Helima described in the new landscape that we're looking at, has had some serious implications for Shell. We saw in response to the decrease in demand of last year, induced by the pandemic, we saw not just OPEC take oil off the market, we saw a lot of other countries stop the high levels of production that they were doing, not because of government actions, but just because of the market and the price. The US was certainly among that group of countries. We saw US production go down from its absolute peak, right before the start of the pandemic, of about 13 million barrels a day, down to, people think maybe two to three million barrels of oil a day came off of US production. The question has been for everyone, how quickly will that production come back?

Dr. Meghan O'Sullivan:
I think, it is a different landscape as you suggested. I think we have investors that frankly, weren't very enthusiastic about making investments into oil and gas production even before the pandemic. I think, the word is, that the pandemic has just expedited a lot of things that were already in motion and potential growing decline in oil demand is among them. I think we will continue to see Shell be an important part of the overall energy landscape. America will continue to be, if not, the largest producer of oil in the world, or one of the largest producers. But I do think that this unique role that Shell was playing for quite a few years, that really put a lot of pressure on a lot of other international actors, particularly OPEC, and how they were able to influence the market. That that is probably a little bit on the back burner.

Dr. Meghan O'Sullivan:
I think we may actually see investors stay with Shell a little bit longer than some other countries that are high cost producers, because of the short cycle nature of Shell. That maybe when investors do start to go back into oil, they're not going to want to invest in projects that take five, seven, 10 years to come online, but they'll still be interested in places where it was only six months or a year till more oil comes online. But overall, I think the role will be a bit diminished there. But before I conclude on that, I would say, you made what I thought was a big assumption, Andrew, which is, that the US is not going to be really a big player on clean energy. I would say two things, maybe I'm overstating what you said, but I would say the US certainly has the potential to be one of, if not, the major players in clean energy.

Dr. Meghan O'Sullivan:
That will depend a lot on what we see from the Biden administration. And certainly president elect, soon to be President Biden has made it very clear that climate is going to be a huge focus of his. If you looked at his website during the campaign and the transition, he only listed four priorities, economic recovery, COVID, climate and racial justice. He's very, very serious about climate. And that's not just raining in US submissions, that is being a leader in the battle against climate change globally as well. That will, of course, involve America stepping forward in every capacity. And certainly one of those part of his $2 trillion plan, will be to invest more in R&D, for advancing more renewable energy technologies. We'll be engaging with other countries much more centrally on the issue of climate change.

Dr. Meghan O'Sullivan:
I think that the US certainly has the potential and the opportunity to recapture a leadership role here. I wouldn't be a quick to write the United States off. In fact, I would fasten my seatbelt and get ready for an international landscape, where the US is taking climate change to be a very serious national security matter. That I think will change the face of US foreign policy in some significant ways, we could go into if there's time.

Andrew:
I hope we have time. I think that's very fascinating. I agree with you. I want to remind the audience that we encourage your questions. We do have a question for General Petraeus, that we'll introduce in a moment. But please use your app, ask questions of the panel, challenge us please, on some of these issues and discussions. I believe in the United States, just so we're clear. But China certainly has a lead in clean tech production. Just to stick with you for a second on Meghan, let's talk a little bit about Kerry's role as climate czar and what we think will transpire there. I'll just come back to what Senator Murphy wrote in FP yesterday, that climate policy should be, and it is foreign policy for the US going forward. What do you expect to from Kerry and climate immediately? Word is, he's been making waves about investment and financing of carbon projects amongst the wall street investor class already. I'd be interested to hear what you've heard.

Dr. Meghan O'Sullivan:
Sure. Well, the appointment of Secretary Kerry as the climates are answerable to the president and at a cabinet level, is really one of, I think the most important markers, indications of how serious the Biden administration is going to be about climate. Climate is going to be central to our domestic policy agenda, but it's also going to be very central to our foreign policy agenda. And as you pointed out, Senator Murphy laid out in his piece in foreign policy, a number of ways in which that might happen. What I would say is that, often people when they think about climate change is going to be part of our foreign policy, they think primarily of the US going back into the Paris climate agreement, which of course it will do quite soon. But it means so much more than that.

Dr. Meghan O'Sullivan:
The Biden administration and Secretary Kerry are talking about infusing climate into every foreign policy interaction. That might be slight overstatement, but I think that is the intention and the objective. This means, again, not just talking about climate, in climate fora and among climate experts, but it means talking about climate in every bilateral relationship. It means asking the different agencies that conduct foreign policy and national security, like the Pentagon and USAID and the state department, to make climate really central in their overall objectives, again, in bilateral relationships and interactions with international organizations. This actually, it sounds like, okay, that sounds like something that we know how to do. But I would say it's going to be challenging, because if you prioritize climate as the Biden ministration intends to do, and I think many of us would acknowledge needs to be done.

Dr. Meghan O'Sullivan:
This is going to mean that other priorities are not going to get the same weight. It means more traditional foreign policy measures like counter terrorism and counter proliferation and conflict resolution. Now, where are those going to fall in the list of priorities? When a president goes to speak to a king or another president or prime minister, there are only so many issues that he or she could push effectively, and climate is now going to be among them. I think Secretary Kerry's role is going to be essential, because he is going to be a large disruptor. And I mean that, not only in the sense of pushing this agenda internationally, but he's going to end up disrupting things within the American foreign policy establishment. I think in part that's very much the intention, because if you are going to challenge traditional American foreign policy to make climate change the first objective, you're going to need somebody who's really going to be willing to upset the apple cart.

Dr. Meghan O'Sullivan:
And that is, he is going to be injected into every foreign policy deliberation, whether or not it's about climate, on the surface of it, to make sure that climate related equities get their fair share of attention. And that of course is going to cause some ripple effects in how policy is made. I think it also is going to prove some challenges because there are going to be multiple senior people that are counter parts in different parts of the world they're going to talk to. They're going to talk to Secretary of State, Tony Blinken. They're also going to talk to Secretary John Kerry. They'll talk to other people in the white house who also have climate on their mind, but other issues as well. I think it is going to be tumultuous, disruptive, but my guess is that the Biden administration intends for that to be the case, because that's what's needed in order to shake up the traditional functioning of foreign policy and national security, which has not considered climate to be central to its execution.

Andrew:
Well said, thank you very much, Meghan. I do think that is something that's clearly going to be insinuated in every discussion and every conversation at every level and in every agency and department. Actually just to change gears a little bit, General Petraeus, a question for you from our audience. As the largest consumer of oil in the world, what role do we think the US military will play in the next four years in accelerating the energy transformation? Will they lead at home and will the ongoing transition in energy enhance US military performance? According to Senator Murphy, the DOD accounts for about 75% of all government carbon emissions. If it were a country, the U S military would be the 55th largest emitter on the planet. Are we taking steps in the right direction?

General David Petraeus:
Well, I'm sure that all of this is going to be accelerated very significantly. There are numerous initiatives around the military right now, huge solar arrays, for example, at Fort bliss, Texas, and near White Sands, New Mexico, and a variety of other of these kinds of initiatives. We actually pursued some all the way back when I was say the commander in Afghanistan, just putting insulation inside a tent, cut our fuel bill by, I think it was 15 or 20%. Keep in mind, in that scenario, you had to bring all that fuel into the country on tankers that had to be secured and all the rest of this. There's a very keen awareness of the need to reduce the consumption of oil and other products, JP-8 and all the rest of this, very significantly.

General David Petraeus:
There have been initiatives ongoing, but this is going to be a huge boost. I think Meghan had a really keen insight. There are going to be interesting times on the seventh floor of the state department, because reportedly former Secretary Kerry is going to be up there alongside his successor, a couple, remove Tony Blinken. There will be cases where the question is going to be, which prison has priority. Is it the prison that we filter through and say, what will the effect of this be on our climate initiatives around the world and at home, or is it the prison that asks, what will the effect of this initiative beyond the US-China relationship? Which is the most important in the world, not just to our two countries, but also to many of the other countries in the world.

General David Petraeus:
And so I think that's going to be fascinating to watch. But there are going to be directives throughout the government. Of course, Secretary Kerry is focused externally. There are also others that would be focused internally. And as Meghan mentioned, in this huge infrastructure bill that is going to be pursued at $1.9 trillion, really the infrastructure is a big component of that. Of course transportation secretary, Pete Buttigieg is already discussing the significance of the green components of that infrastructure bill. I believe with Meghan, that the US is going to become one of the leaders in these various areas and certainly a very competitive element in that.

General David Petraeus:
Could I pivot though to one question and I'd actually like to ask this of Helima, because what we haven't talked about is the impact on oil markets, which are roughly stable right now, given the latest again, OPEC and Russia agreements and so forth. But what happens if we actually returned to the nuclear deal with Iran, we lift the various sanctions and all of a sudden, the biggest disruptor is the disrupted oil that comes back on market. This could be two or more million barrels per day coming back on the market. What happens then Helima?

Helima Croft:
Happy to take that. No, I think this is something that OPEC is looking out on 2021, will they essentially, potentially in the back half of the year, if Iran goes back into the agreement and we could discuss whether Iran is going to take the steps to go back in and become compliant. But as you mentioned, you could be looking at significant quantities of Iranian barrels hitting the market, potentially sometime in the back half of 2021. I think that decision by his Royal Highness, they announced that unilateral Saudi cut of a million barrels at the last OPEC meeting. I think it was done primarily because of the new rising COVID cases, cascading government lockdown restrictions. But I do think they want to start expediting the draw down of this inventory overhang, because they know they may have to accommodate those barrels. I actually asked about that and the OPEC press conference, and I think they are doing that with an eye to getting the market potentially ready for that.

Helima Croft:
But a lot is going to hinge on how successful is the vaccine rollout. What they say is, it's not just the vaccine, it's shots in the arm. And so where we are in terms of the demand recovery, that will really determine can the market absorb those barrels and will OPEC have to do more to accommodate those barrels. I think it's going to be a very interesting discussion when Iran comes back, who sits down their barrels to accommodate Iranian barrels. It looks like it will have to be Saudi Arabia. Will other countries want to also restrict output to allow those Iranian barrels back? Or is the market so strong that it will basically be able to absorb those barrels? I think there's going to be a lot of, those OPEC meetings in the back half of the year, I think are going to be very challenging as they think about those barrels.

Andrew:
Fantastic. Thank you general, excellent question. We've got another one from the audience. I think all of you could probably tackle this. As the energy transition continues, what regions and choke points will become new geopolitical hotspots? How does that impact the US posture abroad? For example, the port of Durban, the export origin for most of the world's cobalt heat up. I don't know if you have any thoughts on that, Meghan.

Dr. Meghan O'Sullivan:
Sure. I think the issue of cobalt and other kinds of critical minerals is one that is a very hot topic of conversation. People are looking at the current landscape and they're saying, wow, China in particular has taken a lot of action to lock up supplies of some of these critical minerals and that these critical minerals are essential to enabling certain renewable technologies. There's some talk or even expectations that we may see something akin to arise of a cartel of countries that actually have control over a relative limited supply of inputs, be it cobalt, be it lithium, be it other things. I think this is something to be concerned about, something to watch. Clearly where we have expectations that the demands for these critical minerals are going to go up significantly as demand for things like electric vehicles go up significantly over the short to medium term.

Dr. Meghan O'Sullivan:
In the long term, I personally am not overly concerned about that. I don't imagine that there's going to be a huge revamping of geopolitics for a few reasons. The main reason is, I think that countries and governments and research facilities are already focused on this problem and they are working hard to find ways to recycle some of these critical minerals like lithium. Once you have the ability to recycle these, then suddenly limited amounts of global supply seems a lot less pressing and a lot less able to drive big political decisions. I also think there's a lot of work being done on developing alternative materials, that can serve in the place of these critical minerals. I think we have some short and medium term challenges managing that, but I think those will be answered with technologies and with programs currently underway, to try to make those critical resources a lot less finite and a lot less vital for the enactment of renewable technologies.

Andrew:
You're quite right. There has been a lot of talk, concern of late about rare earth cartel and certainly China, not the only country that has... They're very good at refining the dirt, but not necessarily the owner of those rare earths. Your contention is that perhaps other nations and economies, the US will catch up.

Dr. Meghan O'Sullivan:
Well, there's certainly, the rare earth element conversation, one of the things that people are always quick to point out rightly so, is that they're not so rare. That actually there are many countries around the world and the US is one of them, where a lot of those rare earth materials are in our soil. The key distinguishing factor, is that China has become the major producer and refiner of those rare earth minerals, because they've been willing to do it at a very low cost, so they basically out-priced the rest of the world. They've been willing to bear a lot of the environmental consequences that come along with the mining that's required to process or extract these rare earth minerals. In a worst case scenario, if the technologies that I'm talking about, don't come to bear, there are other countries that can produce these rare earth minerals.

Dr. Meghan O'Sullivan:
We do actually see the United States and other countries looking at stockpiles, looking at production, thinking more strategically about how to make sure that the US and other countries don't find themselves in a situation that Japan found itself in, in 2010, where they're beholden to China. I do think that this is something that is talked about, but it is something that has been very much on the minds of policymakers and decision makers for quite a few years, since 2010, when China did withhold the export of these materials to Japan, in response to some tussles over the East China sea.

Andrew:
Right. There has been quite a bit of activity by China as well in terms of purchasing some of these non Chinese mines in Africa, even in the US, in Arizona, in Chile. Shameless FP plug, we have done a report on the Chinese control of these natural resources, not just rare earth. And you could find that on our FP insider offering online, if you'd like to check it out. To stick with the regional focus here for a moment. Let's talk about Latin America. This is a question, again, from the audience. We've seen an acceleration of Chinese and Russian investment in the Latin American energy system. How might that involvement impact US national security and will the Biden administration intervene to protect energy in the Western hemisphere, which is often overlooked in energy markets? I wonder if Helima that's something you would care to toss away.

Helima Croft:
No, I think when we talked about Russia's role in OPEC, I think we really clearly see this playing out in the case of Venezuela. A real question about would Maduro stay or go, was increasingly coming down to, would Russia continue to give that financial lifeline to the Maduro regime? We had talked about, traditionally China's role in Venezuela, essentially doing these oil back loans. But we've really seen in the last couple years, it has been Russia that has really developed that very strong relationship with the Venezuelans and extending credit to the Venezuelans, essentially doing deals with the government there, with their oil companies there, that essentially Western firms would not do. And so I do think that the Russians have been able to establish something sort of a beachhead in Venezuela, in our region.

Helima Croft:
I do think, again, when we think about policy challenges for the Biden administration, obviously dealing with Venezuela, the humanitarian crisis, will be an important issue. But again, a broader issue is, have we seen the expansion of Russian influence in the developing world, in these oil producing nations since 2016, and does this pose a significant foreign policy challenge to the United States? Have they filled a vacuum that essentially we've allowed to exist?

Andrew:
Thank you, Helima. General, what do you think?

General David Petraeus:
Well, I hope that the incoming administration and you see Samantha Power, of course nominated to be the director of the Agency for International Development. A woman, everyone respects her enormous intellect and energy and drive as well, and just sheer infectious enthusiasm. It's been apparent for some time that AID together with the International Development Finance Corporation, which doubled its assets under the current administration, outgoing administration, and a variety of other partners around the world. If we could all coordinate and provide alternatives to the Belt and Road Initiative. Because many of these are, again, targeting countries in Africa for the rare earth minerals, the other resources that are needed. And of course Chinese companies and China writ large have gone about this in a form China incorporated, out there doing this, especially with the BRI.

General David Petraeus:
Whereas the US, it's just much more driven by market forces. It's companies out there that need this and concede to the future. I think a more coordinated effort of all of the different of our partners and allies together which I mentioned earlier, will be a big feature of the incoming administration, could again provide alternatives, it could provide alternative models, competition, et cetera. My ultimate hope of course, would be that the security situation in Afghanistan would ultimately allow the extraction of what are not just 1 trillion, but we estimated $2 trillion worth of many rare earth and others. There are locations in Western Afghanistan where you can shovel lithium out of the ground, again, with a shovel and hopefully that could enter the market as well.

General David Petraeus:
Right now it's still a little bit more in the category of venture capital investing, but perhaps down the road. But I do think, again, that there's a real opportunity for the incoming administration, recognizing the need to get our own access to rare earth, other minerals, and also again, to provide competition together for the Belt and Road Initiative.

Andrew:
That's a really, really relevant point and thank you for making it. I do think that economic statecraft is an incredibly important element of, I think we'd all agree on that, would be a very helpful craft for the US to own. Treasury conducts much of US financial and economic diplomacy, and should take the lead along with DFC, along with the Millennium Challenge Corporation as well. Some might contend that China is eating our lunch in green finance in that way. I did want to ask a little bit about that though. As other countries are expanding their processing and their production. This is something that, another question from the audience. How does a country do this when they have to operate by social right to an environmental justice?

Andrew:
How can democracies compete with autocracies, with China, when it comes to this type of development? Helima, I'd like to actually frame this for you, with a question that I was going to ask about something you raised, and that is the Mideast and some of the development, I think Meghan made this point as well. That there are alternative energies being developed and something that's going on in Abu Dhabi right now, a lot of discussion around sustainable energy week. Could the Mideast spawn electro states? Saudi has very low cost solar power, they're even investing in hydrogen production. We've seen the UAE focused on nuclear. What's your take on their ability to grow alternative energy at the same time? And let's be fair, they are autocracies.

Helima Croft:
Well, I think if we talk about the UAE, I think the UAE again has been in the lead in terms of seeing the changes in the energy landscape. We talk about, the fact that they host International Renewable Energy Agency, in Masdar. We talk about the investments that sovereign wealth funds like Mubadala have made in the renewable space. We look at even what the national oil companies like ADNOC are doing. We talk about Saudi as well in terms of solar. Again, I think these countries see the writing on the wall and they are essentially going for the, all of the above energy mix and that's going to be their business model. I do think though, there are some interesting questions to pivot back to the issue about, some of these issues around like cobalt in terms of what do you do about countries like a DRC? There's a DRC. I started my career covering the democratic Republic of Congo after they were coming out of a civil war where five million people died.

Helima Croft:
It was the world's force war at the time. We saw all of these, grave human rights issues around eluvium mining, use of child labor. I do think there's going to be in this energy transition story, questions about how much do we lean on those governments in terms of extraction practices? Are we going to engage with the DRC in terms of how they are actually mining cobalt? Does China have this natural advantage in dealing with a country like the DRC? Because they have been basically providing financial assistance to the Sub-Saharan African countries for decades. They have always taken a view that they will take your resources and not raise human rights and labor concerns. I do think there are going to be these interesting challenges for Western nations as we move forward with this energy transition, how much do we want to try to pressure countries that have these critical minerals to basically put a series of practices around extraction of those minerals.

Andrew:
Very good point. I think we see that general, when we talk about nuclear power and Russia as well. Russia is actually on the forefront on nuclear, some might argue, not in a great way, exporting technology and perhaps not to certain standards. You had a comment as well that you wanted to share.

General David Petraeus:
Well, I really actually wanted to... I hate to keep tossing questions to Helima, but there's another, the biggest question of all, is no longer about peak oil production. It's now about peak oil demand. Every year that the BP product comes out, there's the annual debate about when will we see peak oil demand, and there are various estimates out there. Of course, we should re acknowledge the reality. You highlighted that China's a green power in the making, and it is very much so, but it's also still building coal plants every week or so, because of the enormous continued demand for additional electricity. Again, India, as it grows, the African countries, and Africa of course in aggregate, it's not an aggregate, but in aggregate it's the next China, with demand that will be comparable. I was just curious how you answer that particular question, Helima, about, what is the prospect for peak oil demand?

Helima Croft:
Clearly we are in a transition, and the question is, are we going to see it 2030, 2040? I think the role of government policy is going to play a big role in terms of when we actually hit peak demand. When are we going to get electrification vehicle fleets, public transportation? Government policy will play a role in dictating how fast this transition is coming. It is coming. I think, again, to go back to the imperative, if you are a producer country, it is the take up, what Patty Brown keeps saying is, act like it's happening on a faster pace than it may happen, because you have to prepare for it. You have to get your economies ready for this transition. Again, I worry about the divide between countries like the UAE, who have basically seen where this is headed and have taken very proactive steps to prepare, and a country like Nigeria, 200 million people, as you know General Petraeus, huge counter terrorism issues, huge problems with extremism.

Helima Croft:
What happens to those countries if they don't get ready for that transition? What security threats are posed by petrostates that are now insolvent and unable to pay their military and pay for public services? I deeply worry about the left behind in a transition scenario.

Andrew:
Great. Thank you for that. We've got another question from our audience. A little bit back to the social justice and environmental justice issue. Maybe this is one for you, Meghan, on the US, the new administration and some of its critical plans around social justice and equality. Can the US lead on labor and environmental justice, with such glaring inequity at home now, which has obviously been a cause of a lot of the social unrest we've seen over the course of the past year? I'm just curious on your views on that.

Dr. Meghan O'Sullivan:
Sure. It's a good question. I think it's one that's central to how the Biden administration is thinking about its domestic agenda and its international agenda. I think we see both of those agendas influencing each other, being deeply tied. This is certainly the case with climate as we've been talking about, but I think it's also the case in America taking leadership more generally speaking on the question of democracy, on environmental justice, on racial justice as the questioner was asking. I think there is going to be a real, a lot of scrutiny applied to the Biden administration, to the United States as a whole, to see how our society is going to grapple with, and hopefully aggressively address these inequities within our own society. It is from there that we will be best positioned to be able to encourage others to do the same.

Dr. Meghan O'Sullivan:
I do think, a couple of things, I think that soon to be President Biden, is someone who is maybe uniquely well positioned to try to heal some of the wounds at home. He is serious, and the team that he's put together is clearly serious about prioritizing a lot of these inequities. And so I do think that there's hard work to be done at home, but I'm confident that we can move ahead as a nation. I do think there's going to be a little bit of a lag. It's going to take time for America to demonstrate to the rest of the world that we are leaders in democracy, that our values still align with all of those principles and values that we've been talking to others about abroad. I do think it's going to take time because I do think the American model has been damaged in the last several years.

Dr. Meghan O'Sullivan:
It's been damaged by this America first role. It's been damaged by the incompetency with which our country has handled the coronavirus pandemic. It's been damaged by the real manifestations of systemic racial prejudice in our system. I'd also say, we haven't talked about this right now, but I think the model has been damaged by the happenings on January 6th. I do think it's going to be harder for America to take on that advocacy role, but I don't think that's a permanent thing. I think it is a motivation for us to do work at home, to continue to lend a hand to others abroad who are seeking to enhance their own societies in the same way.

Andrew:
Great, thank you for that. We've been talking a lot about nation, state administration activity. But now that we're touching on social and environmental issues, I wanted to ask a little bit about corporate incentives. It's very interesting yesterday. The US Chamber of Commerce just came out in favor of carbon pricing, that's a real element that might move our economies in the direction of where Europe is going. Obviously we've got different regimes, in different regions. How likely are we to see more linkages between these different economic clusters on carbon pricing? And is that really the thing that will tangibly the profit motive, galvanized movement in this way, along with the administration initiatives, along with social issues, the actual a profit incentive? Meghan, I wonder if you could tackle that one for us to start.

Dr. Meghan O'Sullivan:
Sure. Well, I think the answer obviously depends on who you ask. Personally, I think I align myself with most economists who say, the best way to get action and the most efficient way to tackle the question of carbon emissions, is to put a price on carbon. That can be done in a number of ways. I imagine that the Biden administration will explore that, as you said, in different sectors. I think doing something like a clean electricity standards, is going to be critical to the Biden administration, reaching the goal of having a fully decarbonized electricity sector by 2030. That's one of the big goals there. But I think a more straightforward carbon tax is something that I will just give you my own opinion, I think has been dismissed a little too early.

Dr. Meghan O'Sullivan:
If you remember, four years ago when Bernie Sanders, Senator Sanders was running for president, a carbon tax is a big part of his platform. This time around, you see the Democrats really shying away from it. As most people thought, either, one, this isn't possible to do with Republican support or two, we're not going to do that. That is actually to conservative approach. We're going to be more focused on regulatory measures and on getting change through those types of actions. I think that will continue to be a little bit of a battle for what tools the Biden administration is going to employ to reach those goals. It's interesting, we do see more support for climate action among Republicans. It's still nascent, but I would say it is only going to grow particularly as young Republicans, to the extent they want to stay in the party, they're going to demand action on climate.

Dr. Meghan O'Sullivan:
And as a result, I think we will see some movement in the Republican party on this issue, and that could create some openings for some more efficient approaches, perhaps along the lines of a carbon tax, with the big debate being not about the tax itself, but being about how to distribute the proceeds from the tax. I think there certainly are a lot of ways that a price can be put on carbon, but I do imagine that that will be a central objective of the Biden administration in their domestic climate goals. So they can meet those standards that will underpin what will, again, internationally will be America's nationally determined contribution back in the Paris Agreement.

Andrew:
Certainly. That makes tremendous sense and will be very interesting to see that as a unifying factor across party lines as well, that discussion. General, your thoughts.

General David Petraeus:
Well, this is also going to give a boost to something that we're already seeing in investment businesses. As a partner in one of the world's biggest global investment firms, we've always tried to do well while doing good. They're actually now our funds and we have an impact fund that's linked to the sustainability development goals of the United Nations, in which we're trying to do good while still doing well. There's a huge appetite by investors for this. I'm quite confident that what Meghan has just been laying out will give another boost to this. Again, you're going to probably at some point reach a degree of critical mass set off the chain reaction in which all of these different activities are going to result in quite a few improvements, I would think, in the climate arena, given the various substantial, of course that you're going to see both at home and abroad.

Andrew:
Thank you, general. Helima, what are your views on pricing and generally moving forward on that front, having that bipartisan approach?

Helima Croft:
Well, I think I totally agree with what Meghan and General Petraeus said. I think it was so interesting yesterday. Day one of the Global Energy Forum. You have the congressional panel, where you have the Republican congressman coming out to oppose the carbon pricing. The democratic congresswoman, essentially saying, well, it's just something we'll look at, but we want to move on things, bipartisan support first. And then you had the panel of CEOs, and you had the CEO of United coming out and saying, no, we need a carbon price mechanism. I do think it's going to be interesting to see actually, if you do have the private sector taking the lead on this, and does that potentially move Congress more in that direction?

Andrew:
Fabulous. Thank you, Helima. We could keep going for another hour, but then we would miss a very important event. But I thank you all for your really incredible insights and thoughts about China, about Russia, about Mideast, the impact of relations with Iran, how we might undertake carbon pricing and the impacts, most importantly on what the Biden administration and its efforts on climate will have in the world of energy and geopolitical security. I just want to thank all three of you very much for participating in this discussion. The last panel of the Trump administration to talk through these issues. I really enjoyed it. I'm sure our audience did as well. I hope we can do it again next year or even sooner. Thank you so much.


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