How the oil and gas boom will change America: An interview with Michael Levi

May 5, 2013

Let's get this out of the way first: Michael Levi's new book, "The Power Surge," is very likely to be one of the best things you'll read about the ongoing oil and gas boom in the United States.

True, the book doesn't really have a grand overarching theory. There aren't any sweeping predictions that shale gas will supercharge the U.S. economy or that Canada's tar sands will destroy the planet.

Instead, the book is filled with detailed on-the-ground reporting and carefully reasoned observations about how the oil and gas uptick could have all sorts of unexpected impacts on everything from U.S. foreign policy to climate change to transportation. And it works remarkably well: There were dozens of places that forced me to completely reconsider what I thought I knew about energy markets.

So, to talk a bit more about the book, I called up Levi, who is the David M. Rubenstein Senior Fellow for Energy and the Environment at the Council on Foreign Relations. A transcript follows:

Brad Plumer: There are already a slew of articles about how fracking and other drilling techniques are transforming the energy landscape and creating an oil and gas boom in the United States. Is there really anything left to say?

Michael Levi: Right, if you've already read 800 articles on the topic, why read this? I'd say two reasons. Right now we've got a clash both on the ground and politically between people who want to double down on the oil and gas boom and people who say this is fundamentally the wrong way to go about things. And this book makes a sustained argument for why there are gains to be had across the board.

We've also read a lot about what this boom means for the energy industry, and a bit about what it means for the U.S. economy. But I also wanted to look at what these changes we're seeing mean for people outside the industry.

BP: Let's start with the economy. I've seen bold predictions that the oil and gas boom will create millions of new jobs and skeptical arguments that all this new energy is barely affecting GDP. How do you think about this?

ML: You need to look at three different pieces of the equation. First is the economic activity directly surrounding oil and gas production—the people being hired to work on the drilling itself, but also people working upstream in things like steel for wells and people working downstream working at restaurants and hotels where folks in the industry are availing themselves of those services.

Then you have a broader impact because people are paying less, particularly for natural gas. In a weak economy, if you spend less on one thing, you spend more on the others. And then the third area—and this is part of the natural gas story—in the industries that intensively use natural gas as feedstock, they get a boost directly.

BP: So what kind of economic impact are we talking about?

ML: You can stack all these things together, and you get some impressive numbers, but it's hard to push that beyond a couple percent of the economy. That's because the U.S. economy has become incredibly diversified—and it's very difficult for a single industry to move the needle.

That's not how it's always been. If you go back to the last oil boom of the late 1970s and early 1980s, oil and gas was a much larger part of the economy, so it had larger consequences. Things have changed today. The economy's much bigger, and energy plays a more limited role.

BP: Now what about foreign policy? Plenty of economists and energy analysts have rightly pointed out that even if the United States could produce all the oil it needed, we wouldn't be completely free of global oil markets. We'd still need to care about what goes on in the Middle East, say. But in your book, you argue that this isn't the whole story. Perceptions matter a great deal.

ML: You can read a hundred studies about whether countries should care about where they get their oil from. Economists generally say they shouldn't care. Security specialists say they should. But I was shocked that I could find a study about whether actual world leaders care about where they get their oil from.

So I led a study with a colleague to drill down into that question and see if countries actually behave differently when they think they're less vulnerable. And the answer is that they do. My favorite story is that the Saudis underpriced oil that they sold to us to make sure they'd retain the dominant positioning in the U.S. market because they believed policymakers in Washington would treat their biggest oil supplier more nicely. And they were probably right.

So things that may seem irrational in a world where only economics apply become totally sensible and consequential when people have a different picture of the world.

BP: Okay, now what about climate change and the environment? It seems like a huge oil and gas boom in the United States would have big consequences there.

ML: I think you need to look at oil and gas separately. More oil is bad for climate change, no question. The more difficult question is how it is—and that's one you need to think about costs and benefits.

When you dig into the models people use for this, you find that the same dynamic that suggests that a lot more U.S. oil won't have a big impact on prices also suggests that a lot more oil production won't have a big impact on climate. In both cases, big producers like Saudi Arabia tend to cut back on their own production to compensate.

On the natural gas front, we're mostly seeing coal being displaced. That's a good news story for climate change—at least for now. The bigger question is what happens in a decade or two, when we need to make an even stronger shift to zero-carbon energy. To me, the real climate risk from natural gas is that it could retard the development of zero carbon energy technology and make us politically complacent, so that we don't make that next transition happen.

BP: You also spend a lot of time looking at some of the local environmental impacts of drilling, particularly shale fracking—water pollution, air pollution. And you make the case that it's really in the best interests of oil and gas companies to accept stronger regulations and deal with these problems.

ML It seemed obvious to me that one of the lessons of the BP oil spill [in the Gulf of Mexico in 2010] is that poor performance by one company ruins the party fr everyone else. So all companies should want good standards.

One of the things I found when I went out and talked to people is that the state of regulation affects people's perceptions of what's safe and what's not. The typical person in Colorado is not studying the latest EPA directive on air emissions. What they're wondering is why, if these drilling activities are so safe, companies are opposed to putting new rules on them. So just from a public perception perspective, companies should want to be seen as being better regulated and subject to better enforcement.

And that doesn't mean every single regulation is a good idea, but the International Energy Agency has laid out how you could do a whole host of important things at an incremental cost of 7 percent on each well drilled. And that's not just pure theory. When the IEA announced those "golden rules" for gas, Colorado started to brag because 10 of the rules were taken from things that Colorado is already doing. And Colorado oil and gas companies are doing just fine.

BP: It seems there's a lot of distrust between the two sides on this. Oil and gas companies think that environmentalists just want to ban fracking altogether. Many enviros, for their part, think it's impossible to regulate these companies because they'll just use their political influence to weaken the standards. So it seems hard to reach this compromise where we'll do some fracking but regulate it carefully.

ML: There is a lot of distrust between the two sides, but there's also a tendency for each side to use energy policy to express their ideological preferences. There may be business people in some areas who just really dislike regulation. But they could be more pragmatic and take things on a case-by-case basis rather than try to make an overarching point.

I talk in the book about how the country could take a "most of the above" approach to energy policy. That wouldn't be a world where ExxonMobil and the Sierra Club are singing each others' praises. There would still be conflicts. But it would be a world where the various players are focusing a bit more on gains they could get on different deals and a bit less of what their enemies might lose.

BP: Is there a good example?

ML: Some policymakers have been talking about using revenues from oil and gas drilling to pay for innovative investments to reduce our reliance on oil. That's an area where no one side gets everything, but everyone would benefit.

Instead, we've seen a very different public reaction. People who love oil and gas are now claiming that it wouldn't be worth it to expand drilling if we spent $100 million of the revenue on something else. And people who say that energy innovation is important will say it's not worth it if you have to expand oil and gas to do it. But look, if you believe these things are important, you should be willing to pay a limited price to make that happen.

BP: Here's a slightly different question. The history of energy policy is basically a history of overblown and wrong projections. Is it possible that we're wrong about the coming U.S. oil and gas boom? What if it doesn't pan out for some reason?

ML: That's an important question. There's reason to believe the trends were currently seeing are pretty robust, because there are multiple drivers—price, technology, policy. In oil, we're talking about multiple new resources, not just one concentrated phenomenon.

But we do have to be very wary that we're not complete geniuses in predicting the future. Which means that when we're making strategic decisions, we should try to embrace uncertainty rather than try to fight it.

BP: I'm not sure I quite understand. Is there a good example here?

ML: There's a great example that we're seeing right now. Back in 2007, Congress imposed a mandate for a certain volume of ethanol in gasoline. Lawmakers thought that cars and trucks could handle this because it would be diluted in a large volume of gasoline. But it turned out that the country started cutting its consumption of gasoline, so there wasn't enough room to dilute the ethanol. So now people are worried that either the mandate will collapse or gas prices will rise. So we need to be careful about setting policy that will hold up when our projections are wrong.

BP: So are there things we're not really thinking about now that could have a huge effect on energy policy in the future?

ML: My favorite chapter of the book is one called "Wild Cards." Up until now I've given a thorough look at all the possible effects of the U.S. oil and gas boom, and now I look at five things that could totally change all of this. What if peak oil is right? What if the climate is more or less sensitive to carbon dioxide than we thought it was?

For instance, I like thinking about what if the world became less globalized. We like to think of globalization as inevitable, but historically it has run not only forward but also backward. You don't even need to go that far back in the past. When the first oil crisis struck in 1973, we didn't have particularly globalized oil markets. Today we do. If that were to change, then the benefits of producing more oil at home and consuming less would increase. At the same time, our ability to drive renewable energy ahead through global supply chains and technology development would also change. It's interesting to think through these cases.

BP: And what about other technologies? Oil and gas has taken off in the United States thanks to fracking and other advances in drilling. But is there anything that could do the same for renewables or other alternative energy sources?

ML: Big gains in battery technology are one possibility. Those could come across the board, from either advances in basic science to manufacturing innovations to ways that we incorporate the batteries into the technology we use.

One thing I learned is that different car companies aren't just experimenting with different types of batteries but also different philosophies for integrating their batteries into cars. Chevrolet designs cars that are custom built around electric drives and batter-powered engines, because it thinks that's the best way to effectively integrate electric power. By contrast, Ford is trying to build one single platform it an use as a traditional hybrid, a plug-in hybrid, and an electric, because it thinks that's how to make the economics work. That kind of experimentation is just as important and interesting as getting the chemistry right.

BP: Since we're talking about predicting the future, here's a question—how did all these big advances in oil and gas drilling stay under the radar for so long? Companies had been working on ways to drill in shale for years beforehand, but everyone was surprised when it led to a huge glut of gas production in 2009.

ML: On the natural gas front, the high prices [during the early and mid 2000s] which helped drive a lot of investment may have helped obscure this story. A lot of people saw all these new technologies and said, this could help produce more natural gas, but then the price will go down and this will all go away. What surprised people was that the surge in drilling persisted even after prices crashed.

BP: Why did it persist?

ML: High prices allowed people to take all sorts of risks on technology and bring costs down. By the time natural-gas prices crashed, people were able to get out ahead and survive low prices. If natural gas prices had crashed in 2003 and stayed low, I doubt we'd have fracking technology that's affordable enough to stick around when prices are low.

And that's something policymakers can help replicate—to provide a window for tech developers to drive costs down.

BP: Do you see the shale gas boom spreading to other countries? I feel like one week I'll read a story optimistic about shale gas in Europe, and the next week there'll be a pessimistic counterpoint.

ML: When you don't have much data, it's easy to have optimism and pessimism coexisting. We don't have much data because we don't have a lot of wells drilled abroad.

The United States was really in the sweet spot for shale gas and tight oil. We have private land rights in much of the country, so drilling could progress with involvement of politics. We have deep and liquid future markets, so companies could finance drilling by selling gas forward. The country's densely populated enough so that companies are usually near to a decent source of water and reasonably close to markets to sell gas to, but it's not so dense that every oil and gas prospect is sitting under a city. And the United States has been aggressively explored for a century, so we know what's underground.

It's hard to see all of those pieces elsewhere. Europe has much higher population densities, so the environmental issues around drilling are more acute. There also aren't robust futures markets to finance projects. In China, the biggest shale gas prospects are in places that don't have lots of water, and they're not particularly close to areas that need natural gas. That drives the cost up. But if I had to pick one place, I'd say China, because the Chinese government can get around the challenges of finacing.

Interview has been very lightly edited for length and clarity.

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