Yergin: $40 oil isn't happening. Where energy is headed after Iran.

Mint

a day ago

The surprisingly calm reaction in global oil markets to the U.S. and Israeli attacks on Iran's nuclear operations highlights the realigning world order of oil supply.
Daniel Yergin, vice chairman of S&P Global, spoke to Barron's on Wednesday about the implications of the conflict and the two-month cease-fire announced this week on oil markets, which have since stabilized. Brent crude is trading at $66, just around where it was priced before Israel first attacked Iran on June 13.
'The market is telling us that a disruption of supply isn't expected, which implies that this cease-fire will hold. But is the crisis over? Only the events will provide that answer," said Yergin, a Pulitzer Prize-winning historian of oil.
This transcript of the conversation has been edited.
Barron's: How have the increased tensions in the Middle East and U.S. and Israeli attacks on Iran's nuclear facilities impacted your outlook for oil prices?
Daniel Yergin: Going into this latest crisis, prices were set to be in a lower range than they had been before. Coming out of the crisis, they will probably revert to that low range, unless the cease-fire doesn't hold or there is some other disruption. The risk premium that went into the price was actually not that high given the amount of oil and [liquefied natural gas] that flows out of the Gulf. But there was no meaningful disruption.
A year ago, we were talking about a range of $70-85 [per barrel of Brent]. Now it seems more likely like a $55-70 range, because of the imbalance between supply and demand.
Are you concerned Iran may retaliate further? Is Middle East oil infrastructure still vulnerable?
There is such a concentration of infrastructure—not only oil and gas but also desalinization. But it isn't necessarily rational for the Iranians to attack the Arab side of the Gulf, because, at least lately, there has been something of a detente between Iran and the Gulf Arab states. There has been a lowering of tension between both the Iranian side and on the Arab side, an effort to modulate tensions between them. You could see that in the Gulf states' statements. They deplored violence.
One of the key elements for Iran to consider is that it depends upon the Strait of Hormuz to export oil and for its main source of revenue. Any disruption of the Strait would very likely bring retaliation against its own oil infrastructure. There are checks and balances at work here, even in a volatile war situation.
China is the main buyer of the oil that goes through the Strait, and given Iran's relationship with China, that isn't something they would want to disrupt. China is their biggest buyer of oil by far.
How does OPEC+ factor into this? They increased production recently.
It is the Gulf Arab states who are the real ones in favor of increasing production, because they have all the shut-in production, and I think that they had really come to that conclusion several months ago.
Some countries weren't sticking to quotas. But more important, they decided it was finally time to bring back this oil that they had been keeping on the sidelines and to accept the price consequences, but make it up—at least to some extent—by volume what they may lose on price. They clearly want to regain market share that they may have lost to other producers.
Before Israel attacked Iran, there was talk in the market about potentially $40 oil by the end of the year. Is that possible?
Certainly not $40, but based upon market conditions, we see oil prices at the end of the year lower than we have seen for some time. The fourth quarter is when I expect to see the biggest weakness in price.
What does that mean for the U.S. producers?
They have an obligation, a big social contract, to return money to investors. Therefore, when prices come down, then they would indeed reduce levels of investment. We already saw companies beginning to reduce their investment level. I think in July we will see companies really rethinking, looking very carefully, at how to be more prudent in terms of investment.
The thing about shale is you have to keep investing to maintain production. So, in a lower-price environment, if we could see prices for an extended period in the $50s, then next year, we would see U.S. oil production going down.
What does this all mean for the energy transition?
The energy transition, as conceptualized in the last few years, is in trouble. There was this notion that there was going to be this linear transition that we get to net zero by 2050 for about half the world's emissions. The energy transition is going to be slower, more expensive. And it will be multidimensional—unfolding at different paces in different regions, with different mixes of technology, and definitely with different priorities. I'm just back from Asia, and it was clear that countries aren't going to trade-off economic growth. Economic growth and poverty reduction are just as big priorities as addressing climate.
Wind and solar continue to grow. In the U.S., obviously the pace of that transition will be further affected by what happens in the current legislative battles of the budget. The fate of the tax breaks will have a big impact. But the biggest thing going on is the resurgence of natural gas: If you also look at the orders for gas turbines to generate electricity, they are through the roof
It is odd that we just have this crisis in the Gulf, and we're all concerned about energy security. But the biggest area of protracted concern for energy security is about electricity and the reliability of electric power systems to meet the demand requirements of artificial intelligence. We show that data centers alone could go from 4% to about 10% of total electricity demand by 2030 in the U.S. But how do you produce the power? Natural gas is going to have a bigger role in it, and we will see the question of postponing the closing of coal plants.
Despite the situation in the Middle East, where tensions remain high as the cease-fire may or may not hold, oil is still at the price level it was weeks ago. It seems like oil isn't a weapon anymore. Is that right?
There is a stabilizer that wasn't there in previous crises. The global oil market has been rebalanced. The fact that the U.S. is now the world's largest producer of oil and the largest exporter of LNG changes both the geopolitical, the physical, and the psychological balance. That is very different from earlier decades, where the U.S. was an offset. It doesn't mean that the Gulf is less important. I think the growth in the Western Hemisphere, that is important.
People generally know who the three largest oil producers in the world are the U.S., Saudi Arabia, and Russia. But how many know the fourth largest oil producer in the world is Canada? Canada is growing. Brazil is growing. Guyana is growing. That is not great news for Vladimir Putin.
Thanks, Dan.
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