What will the future of energy look like? Will natural gas make a rebound? What about oil? Will our dependency on it continue, or will it wane?
We recently put some of these questions to Steve Coll of the New Yorker, whose new book, Private Empire: ExxonMobil and American Power looks at the oil giant and its role in the energy economy. Where the Texas-headquartered company goes next, and how it prioritizes its development, can offer insight on where our energy future as a whole is headed.
Coll notes that ExxonMobil has made huge investments in unconventional oil and gas in the United States, most notably with their purchase of the Fort Worth company XTO in 2010, one of the largest producers of unconventional natural gas deposits in the country. “ExxonMobil produces so much oil and gas every day, so just replacing the amount they produce and sell and remaining whole without shrinking is an enormous challenge,” Coll says. ExxonMobil also has had to look for oil and gas in developing countries like Nigeria, and in unconventional ways in the United States and Canada.
Q: I think if you look at natural gas right now, people are really concerned. Hitting the lowest prices it’s seen in a decade in April. And people are saying: ‘Well, we’ve really developed this rapidly, and we’ve got this huge glut of natural gas now, and there’s not a lot of ways to use it.’ So I was curious: why you think Exxon Mobil made that choice to develop so much natural gas?
A: Well, I think they looked out over the next 30 or 40 years and they saw through their kind of projections of electric power demand in the United States, the future of the economy, and also the constraints on heavy carbon fuels like coal and also oil as a result of rising concerns about global warming, they assumed that eventually a price on carbon would come into play in the United States. All of that led them to natural gas.
Natural gas has a relatively low carbon footprint if it’s produced efficiently, and it’s flexible. It’s useful for electric power generation, useful for feed stock, useful potentially for transportation by converting bus fleets. So I think the criticism they’ve received is not that they’ve made the strategic bet, because I think the sense that gas has a future in the United States seems pretty persuasive. It’s that maybe they bought in at the top of the market when they bought XTO. Gas prices have collapsed.
Now ExxonMobil will typically say, ‘Well, we don’t make these decisions on the basis of short-term prices. We make them on the basis of 30 or 40 years, plus we can get value out of properties that other people don’t know how to get value out of.’ Well maybe, we’ll see. But prices are certainly low, and they look so far as if they’re not inducing the cutbacks and the other changes that normally would cause prices to go back up again. The history of commodity prices like oil and gas is: they just rise and fall based on over-supply and under-supply and then over-supply, and nobody ever finds the steady median.
I think in the case of gas, the one difference from oil or other commodities is that gas could provide a real boom to American manufacturing by lowering the costs of our industry. Because it’s an input to manufacturing, a source of feed stock energy and other kind of basic elements of a manufacturing industry. And there’s a sense now that with labor costs rising in China, and other changes to the global competitive landscape, you could see a real resurgence of American manufacturing, which everyone has been wishing for for a long time. Nobody predicted that such a thing would happen as a result of gas prices as low as they are now, but it may be a positive source of demand that ultimately lifts some of those prices.
Q: Well picking up on the fact that this company looks out 30, 40 years into the future, how do they see the future of oil consumption, both in the U.S. and in the world? I mean we’re in a market now that has feasible alternatives such as plug-ins and hybrids. Do they see the retail landscape of going out and filling up your car at an ExxonMobil gas station changing, and how are they preparing to deal with that?
A: Yeah, it’s a good question. They think about that very carefully. I think their assessment is that in the United States and in Europe, gasoline demand has likely peaked or will flatten due to the rise of hybrids, efficiencies in the combustion engine that can keep coming online and other factors. But that flattening or slight decline over 30 or 40 years will be more than offset by the rise of middle classes in China, India, Brazil and other industrializing countries.
But it seems as if it’s well established that when middle classes form around the world, no matter what cultural setting they’re in, they want as many cars in the garage as roughly Americans have now. And if that’s roughly true, the Chinese are so far from having two cars in the garage, that once they start buying those cars, their demand for gasoline is going to more than offset any efficiencies or conservation that starts to develop in the United States.
Now, there’s one wildcard. ExxonMobil studies alternative technologies carefully, in part to make sure that they aren’t surprised by any breakthrough that would threaten their fundamentals. From my reporting, the impression that I had is that there’s one alternative technology that they’re most concerned about, and that’s battery capacity. Because if battery storage capacity were to improve radically, so that all electric vehicles were both affordable and scalable on a global basis, then you could see a very rapid move away from oil as a transportation fuel for cars. It would still survive for aviation fuel and ships and that sort of thing, but it would be a niche at that point, and that could be a radical change. I think from today looking out 30 or 40 years, that’s the only big breakthrough that they would credit at having even a ghost of a chance. But they actually don’t think that’s going to happen.
Q: Well, I think that leads to the question of supply. Are they concerned, or are other companies concerned that there’s going to be enough oil 40 years from now, 80 years from now. What are their forecasts for the actual recoverable supply out there?
A: I think their view is that there’s no geological peak anywhere in sight because of improvements in technology that makes oil available that was not previously seen as recoverable. Recoverable in the oil sands [of Canada] or the unconventional oil in Venezuela that’s now possible to access and refine at certain price levels. It has to be economic to do this additional manufacturing, but I don’t think they see any geological limits offshore, under the Arctic.
And irony is, they just did a huge deal in Russia to work in the summer north of the Arctic circle to access oil reserves that weren’t accessible 30 years ago because there was too much sheet ice. Maybe the rapid pace of global warming will create new exposures of recoverable oil. I think their concern as a company is not the world’s geological oil, their concern is their political capacity to access it because of resource nationalism. So, they can’t get to the easy oil as anywhere as swiftly as they could before, and so that’s a challenge to their business model, but it’s not really a challenge to global supply.