March 15, 2008
Even at $100 a barrel, oil is still cheaper than a Starbucks latte.
At the age of 7, when most kids are climbing trees, John Hess was surveying foreign oilfields. The son of Leon Hess, a forceful entrepreneur who built a small home-heating business in New Jersey into a global oil company, the younger Hess immersed himself in the oil world from an early age, studying Arabic and Farsi to better connect with Middle Eastern oil executives. Now the CEO of Hess Corp., he's become an advocate for energy conservation and investment in alternative fuels. NEWSWEEK'S Fareed Zakaria spoke to him about the new world of $100-a-barrel oil, and the likelihood of an energy crisis. Excerpts:
Zakaria: Why has oil moved over $100 a barrel?
Hess: We've moved from a supply-led market to a demand-led one. In the past, the world has relied on OPEC's spare capacity, which in 1985 was 10 million barrels per day. Today that number is about 2.5 million barrels a day. We no longer have a safety margin to ensure price stability in the face of supply interruptions and demand spikes. Right now it's hard to see any relief in sight. Then there's demand. About 50 percent of oil demand is for transportation, and auto ownership in the developing countries is growing swiftly, especially in India and China. Goldman Sachs estimates that by 2050, they could have 1.1 billion cars on the road, up from just 20 million three years ago. That's an overwhelming increase in the need for automotive fuel. Put those two things together—limited supply and increasing demand—and you get high oil prices.
Oil prices have quintupled in the past six years, from $20 to $100 a barrel. Why hasn't that weakened demand?
I think that's been a huge surprise to everyone. I remember meeting with government officials when oil was heading towards $25, and they thought economic disaster was around the corner. They thought the same thing at $50 and $75 a barrel. The reason we've withstood the increase is that consumer income has grown faster than energy expenditures have. We spend about 6 percent of our income on energy, down from 8 percent 20 years ago. Energy just isn't the largest or most important item in our personal spending. Even after the recent price increases, gasoline is still two times less than the cost of Evian water, and 10 times less than a Starbucks latte.
Do high oil prices make affordable new methods of recovery that weren't possible before?
Definitely. They have increased investment in exploration and production, which is currently about $350 billion a year. Some of that money is going to new frontiers, like deep water. Ten years ago you wouldn't even think of drilling in 7,000 feet of water. Now people are doing that in the Gulf of Mexico, Brazil and West Africa. There are also unconventional oil resources now being brought to the market, including shale oil from tar sands.
Will that solve the supply problem?
No. The two big tar-sands deposits are in Canada and Venezuela. They produce 1.7 million barrels a day of it, and, if everything goes right, that could be 4 million barrels a day by 2015. But the world is consuming 86 million barrels a day, and each year we use 1 to 1.5 million barrels a day more than we did the year before. An extra 4 million barrels, while nice to have, is a drop in the bucket. We don't just need more investment in tar sands; we need a whole new oil province every year, a new Azerbaijan or Alaskan North Slope. The recent discoveries in Brazil's Santos Basin are very exciting, and very promising. But you're probably not going to get much new supply from it until eight or 10 years from now, and by then we're going to need a new one at least as big.
So what's the answer, then?
We need to move on both the supply and demand sides simultaneously and urgently. On the supply side, we need to invest more. OPEC nations have about two thirds of the world's proven conventional crude reserves, and one third of its production capacity. So they certainly have the resource base to relieve the pressure. Saudi Arabia, for one, is spending $50 billion to increase their spare capacity by an extra 2 million barrels a day, which will provide a cushion for the world. Other countries should follow suit. But … first and foremost comes demand. We can't blame this problem on OPEC, because we have so much wasteful and inefficient consumption. The automobiles we have on the road today are quite inefficient—less than 20 percent of the fuel energy is actually converted to useful energy. We should certainly increase hybrid ownership, but I believe that hydrogen fuel cells are the breakthrough technology we need.
It appears to me that too many of these countries are using their oil revenues to subsidize their current populations' needs, rather than for long-term investments.
Directionally, you're right. Certainly some of these countries could do more. Iraq and Iran are critical. Outside of Saudi Arabia, they have the two biggest endowments in conventional oil reserves. But they're not investing enough. In Iraq, that's for obvious reasons—there's a security issue. In Iran, because of their political issues, they've limited reinvestment, too.
Are you pessimistic about the future?
To date, a total of 1 trillion barrels of oil have been produced, and it's conventionally understood that we have 2 trillion barrels left in the ground. That leads a lot of people to assume things are going to be fine. Unfortunately, the frontiers are getting more difficult to access, and some oil-producing nations are giving priority to their political agendas. The IEA [International Energy Agency] predicts global demand to average 98.5 million barrels a day in 2015; it's hard to see how we can meet that level of production. To have sustainable economic growth 10 years from now, both consumers and producers need to start acting now.