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Columbia Energy Exchange

Making Sense Of Soaring Oil Prices


Ed Morse

Managing Director and Gobal Head of Commodity Research at Citigroup

Heavy Russian airstrikes continue in Ukraine with no end in sight. 

As the conflict escalates, rising oil prices are causing alarm about the future of global energy markets. So far, sanctions issued by the European Union have spared Russia’s energy exports, but some European Commission officials have started to call for an oil embargo. 

To make sense of the recent oil price volatility, host Jason Bordoff called on energy expert Ed Morse. Morse has been focused on energy policy and commodities since the 1970s and is currently the managing director and global head of commodity research at Citi Group.

He was a senior fellow at the Council on Foreign Relations and served as the deputy assistant secretary of state for energy policy in both the Carter and Reagan administrations. 

Together, they discuss what Russia’s invasion of Ukraine means moving forward for global oil supplies and prices at the pump.


Ed Morse [00:00:02] Well, Russian crude is called Marzouk, there is no kind of immediate replacement for it, at least not fully. The biggest opportunity is to import more Canadian crude, which we can now do because we have the Enbridge Line three with its capacity doubled. That brings it to Chicago and South, and it can then hook into the cap line that’s been reversed and bring that to St. James, Louisiana, or spur into a Texas port. So over time, we’ll get will be able to replace it.

Jason Bordoff [00:00:37] Russian airstrikes continue to devastate Ukrainian cities and Kiev. City officials say the death toll in the country’s capital city alone stands at well over 200 people. Meanwhile, rising oil and gas prices have sparked new fears about energy markets as alarm grows about whether a resolution to Russia’s invasion of Ukraine can be reached any time soon. So far, U.S. and EU sanctions have mostly spared Russia’s energy exports, but some in the European Commission are calling for energy to be targeted more directly. Even as oil and natural gas prices remain at very high levels, last week, U.S. crude and Brant crude prices rose and they stand at around $110 a barrel today. How should we understand recent oil price volatility? The impact on consumers at the pump? What Russia’s invasion of Ukraine will mean moving forward for oil and what policymakers can do about it, if anything. This is Columbia Energy Exchange, a weekly podcast from the Center on Global Energy Policy at Columbia University. I’m Jason Bordoff. Today on the show, we have Ed Morse, Ed is a legend among oil market analysts, having been at the center of global energy and commodity markets since the last oil crises of the 1970s. He’s currently managing director and global head of commodity research at Citigroup and was a senior fellow at the Council on Foreign Relations and served as the deputy assistant secretary of State for Energy Policy in both the Carter and Reagan administrations. He started Princeton, Johns Hopkins and Right here at Columbia, and he currently serves on the advisory board of the Center on Global Energy Policy. The conversation, focused on oil, will need to have another hour entirely to deal with natural gas and other commodities, and breaks down what the ripple effects of the U.S. Russian crude ban might be. What oil prices mean now for markets and in the future, and where alternatives to Russian oil could come from? Ed Morse Welcome. For the first time, remarkably to Columbia Energy Exchange, it’s great to have you on.

Ed Morse [00:02:42] Pleasure to be with you.

Jason Bordoff [00:02:43] It’s kind of remarkable. It’s been so long given how important you’ve been to the Center on Global Energy Policy and to my being here, people may not know I am at Columbia because we had a drink about a decade ago in Washington. And you said in passing, people at Columbia were interested to do some stuff in energy, and that led to a series of conversations that led to my being offered a job here and the Center on Global Energy Policy. So we literally would not be here without you.

Ed Morse [00:03:08] And I for some accidental reason was on that search committee at Columbia.

Jason Bordoff [00:03:11] I’m very grateful for that. That suggestion and grateful for you making time. I know how remarkably busy you are right now in the midst of the energy market and other commodity market consequences of what’s happening with the Russia conflict in Ukraine. And so let’s just pick it up, I guess just start at a high level and help people understand from your standpoint where where are we, where people you hear the worst energy crisis since the 1970s? Or, you know, where are we in terms of the energy crisis, if that’s the right word to use today as a result of what is happening today in Ukraine?

Ed Morse [00:03:48] I think the use of the word energy crisis is appropriate. There’s a kind of a commodity prices, and that’s because Russia is such a large player in the commodity world. Whether you’re looking at energy where it has actually an important role, but they’re not the biggest exporters of crude, they’re not the biggest export is a product. They are the biggest export is of things like nickel and palm oil and barley, which has an impact on the world they are the largest export is of other things. The third largest exporter of aluminum, the largest exporter of nickel, has really affected the markets much more than whatever has happened in the energy world. But that’s all speculative. It’s all based on a risk premium that has to do with what might happen, not what we can observe is happening on the ground in the market and there there is no energy crisis at the moment is just a potential one. There have been impacts, but we can talk about those. Yeah.

Jason Bordoff [00:04:51] So that’s an important point and we’ll come back to those other commodities. But when you say there’s a potential crisis, there is not one today. Nonetheless, we saw oil prices surge to 130 dollars before easing off. So how do you explain to people why there’s not an energy crisis? And there’s a sense that lots of Russian oil is is not on the market today because of the pressure that’s being placed on companies to stop doing business with Russia.

Ed Morse [00:05:16] Yes, I think that’s where we have already figured out. And by we, I mean, the market has already figured out that the rumors of three weeks ago and two weeks ago that two million barrels a day of oil of Russian oil was off the market turned out to be incorrect. We’re still living with the statements coming out of the IEA that there could be a three million barrel a day loss of oil from Russia. It turned out that the very first week of the month of March exports were down. But you know, they go up and down. And what was down the first week was about a million 400000 barrels a day of Russian exports, half of which were products, mostly diesel.

Jason Bordoff [00:05:55] And just to remind just to remind people there’s eight million total about five of crude and three of export of product. Is that right?

Ed Morse [00:06:03] Well, it’s I. I kind of counted a seven million barrels a day of total oil exports because I don’t count exports to Kazakhstan and other Caspian countries as something that’s meaningful to global markets. So there’s basically seven million barrels a day, two million barrels a day of that make Russia the second largest exporter of petroleum products in the world. But it is two million barrels a day of petroleum products, virtually all of which is sold on a seaborne basis. That leaves five million barrels a day of crude oil and roughly two and a half million barrels a day. Each goes either through pipelines that go to inland destinations like Germany or like. Dodging in China and the other half is sold seaborne in a bunch of ports. They include West Luger in the Baltic, and they include free mask in the Baltic. They include an overseas stock in the Black Sea. They include Cosmi now and in East Asia, and there are a couple of others, but it’s basically half and half so we can track pipelines. The only danger to the pipelines is in the conflict that we see underway. Somebody might want to sabotage the pipeline system, blow it up so that that is a danger. But we have to remember that nobody other than the United States has really blocked imports of Russian crude. And indeed, the alliance between the U.S. and Europe has been cemented by the knowledge that exports of gas and exports of oil to Europe can flow so they are not restricted, except to the degree that a country wants to restrict them. So, so we generally think that the two and a half million barrels a day of pipeline exports round it, going inland to places like refineries in Germany or Poland, Hungary, Czech Republic, Slovakia or the Baltic states, Latvia, Lithuania and Estonia. And those going inland to China are not absolutely not going to be disrupted unless there is a physical impediment like a bomb going off that breaks up a pipeline. So two and a half million barrels a day is what we’re talking about, and it’s the seaborne trade. The seaborne trade is highly big in Europe. About two million barrels a day of seaborne exports come out of Europe, and about a little over half a million barrels a day come out of the Port of Cosmi, now near Vladivostok. And we’re not we’re not thinking about those exports from Asia being being affected. So it really is around in the two million a day. But it’s been about a million five hundred and fifty thousand a day from the two Baltic ports we slugger and pretty much said St. Petersburg. And then around three hundred and twenty five thousand barrels a day out of the Black Sea. Now, as I say, indicated people in the market thought that the world was seeing a drop in Russian exports in the first week of March. And yes, there was a drop, as I was saying, about 700000 barrels a day. You were shipments of of of crude oil and about the same amount, 700000 day a product now that we have data through the middle of this week. It turns out that on a daily average basis, seaborne crude exports out of those ports is a little bit higher than the average exports in both January and February. So the concern that is now in the market on lost crude is because the shipments have gone underground. We no longer have auctions. We no longer know who’s bidding in the auction. We have an after auction, basically. So, you know, we have one visible major company that said me a cabal. Never. I’ll never buy Russian crude again, and we know that what they had bought was tempting, and this is an important part of the situation. That company bought at a discount. We think of about twenty eight dollars a barrel Urals discount to Brant, as opposed to two, two and a half dollars a barrel discount on the first week of January. So yes, for reasons of concern about what might happen to exports, it has been harder for Russian companies to sell crude unless you get a selling price. And we have to remember that there is no restriction on European companies for buying Russian crude. So, you know, we say markets will work themselves out and markets will find a way to deal with this. It may be a little bit bumpy, but there is a kind of view in the market right now that we, you know, we don’t know of any liftings after middle of March and what’s going to happen when we get to April. Who’s going to be buying the crude? But there are people buying the crude and they are putting it to use, whether it’s being shipped to India, whether it’s actually being shipped to countries like Italy in the Mediterranean or Poland in in the Baltic area, their cargoes being shipped. There’s also significant evidence that oil is going. Into storage, and there are kind of two particular elements about that, Jason, and you know, intimately what happens with Iranian crude as Iranian crude gets stored in Fujairah and then gets blended into somebody else’s crude and then gets shipped into the marketplace? And nobody really knows how much Iranian crude they’re buying when they’re buying on that kind of basis. Just as when you have a ship to ship transfer, you don’t know what the ship to which Iranian crude is transferred, how much of that is going to be Iranian crude and which in the ship and how much is a mixture of somebody else’s crude. So we’re we don’t yet have visibility on ship to ship transfers, but you can more or less assume that they’re going to happen because it’s a market in which you buy at this incredible discount, and the incredible discount now is over $30 a barrel. So when you get that kind of discount, you have an incentive for people, the right kind of buyer to start someplace, hold it in storage. That $32 discounts pretty important. And then you can resell it as you know, x y z quality crude without noting what the origins are.

Jason Bordoff [00:12:57] So let me come back to just a couple of highlight a few points and make sure I understood and all our listeners understand what you were saying. So first, you talked about the U.S. banned the import of Russian crude, and what I think I heard you say is that was more symbolic than anything else. It didn’t have a big impact on the price we pay at the pump. Is that right? Well, we

Ed Morse [00:13:15] didn’t get into that, and it does have a little bit of an impact because it’s very hard crude to replace with other people’s crude. So, you know, it depends on the week. Some weeks we were importing 500000 barrels a day, some weeks we were importing 800000 barrels a day. Those weeks actually made Russia the second largest source of U.S. crude in terms of imports.

Jason Bordoff [00:13:39] And just explain why we’re doing that. Different kinds of crude where we’re this massive producer now with shale, why are we importing Russian crude? Why were we?

Ed Morse [00:13:47] Well, Russian crude is called Masud. It’s actually not. Crude is residual fuel oil. It is being produced because Russian refining is not as efficient as U.S. refining. And of all the refinery systems in the world, the U.S. refining system has the best operating capacity. And if it’s the cheapest feedstock available, why not use it? And in a way has substituted for the declines that we’ve seen in Venezuelan crude and Mexican food. So there is no kind of immediate replacement for it, at least not fully. The biggest opportunity is to import more Canadian crude, which we can now do because we have the Enbridge Line three with its capacity doubled. That brings it to Chicago and South, and it can then hook into the cap line that’s been reversed and bring that to St. James, Louisiana, or spur into a Texas port. So over time, we’ll get will be able to replace it, but not immediately. And in the meantime, it’ll be a bit more expensive as a feedstock.

Jason Bordoff [00:14:57] You mentioned Canadian crude, and one of the criticisms we’ve heard from some on the right is we were importing Western crude because we didn’t build the Keystone pipeline. Is that valid and accurate?

Ed Morse [00:15:07] It is absolutely valid and accurate. And the reason we can now import the crude is because a pipeline system other than that pipeline is now available to move the crude to the U.S. Gulf Coast.

Jason Bordoff [00:15:20] You, you mentioned Russian. So then the question is some amount is not coming to the U.S., but I hear you saying it’s not entirely, but for the most part, a global market and Russian crude can go somewhere else if it doesn’t come to the U.S.. There was a sense that even though the only, as you said, the U.S., I think the U.K. too were the only countries that directly put an embargo on Russian crude. We were nonetheless losing huge amounts of supply to the global market because of countries being uncertain about the scope of other sanctions, like financial and banking, or just stigma and reputation risk. You know, company oil companies, not just energy, but others saying, we’re not doing any business with Russia at all. I hear you saying that that was a concern that you, we have data now to suggest was wildly overblown. And maybe those some companies that we all know of and can name off the top of our head are not transacting with Russia. But that just means other people will be buying that Russian oil and paying a discount for it. Is that right?

Ed Morse [00:16:20] Yes. But I would also like to say that in the meantime, we have a dislocation in the market, and part of that dislocation in the market is affecting the price by helping it to go up when dislocation is OK. That crude is not going to the U.S., but you need some alternative source going into the U.S., and that crude has to find a market somewhere else, some buyer somewhere else. So to the. That there are a lot of companies in the four big ones that had upstream opportunities that they and investments in Russia have said they’re no longer going to either no longer are or soon will no longer be lifting Russian crude. That’s a large number, and it has to find some other buyer, which is why we’re seeing crude from Russia going into storage. And it’ll come out again. So while we have a period of dislocation, technically it’s not available to the world, but it will work out over time. And and maybe the dislocations that are going to happen are greater in the next month or so than the ones in the past two weeks, because there’ll be more of what I call an underground market an aftermarket as in an auction, after market, under under under way and and the trade routes will, you know, will have to be different and they’ll eventually be worked out. I’d also like to note, and it is a really important point that people don’t understand when they think about price movements. The majority of trading in these prompt contracts on ice or on are on CME. These the majority of these contracts are traded by. Algorithmic quantitative trading houses, this is trading by machines, not by human beings, and at times it’s 60 percent of the trading that takes place on a daily basis. So if the algorithm in the signals that the artificial intelligence has taught the machine, the machine will make a decision based on a momentum that is likely to make the price go up or down. So it’s not like there are human beings involved in this to a significant degree, and in actuality, it’s quite the contrary. So one of the actual problems in the market is the speculative community has decided to stand on the sidelines because they’re confronting a binary situation where either there’ll be more available or less available and they become risk averse. So the actual liquidity and trading in the market has shrunk. At the same time that the algorithmic trading by machine learning has not shrunk, giving it an even greater distortionary impact on price volatility.

Jason Bordoff [00:19:14] So are you saying that the reason we pay what we do at the pump, which reflects indirectly a global crude oil price? We can talk about whether there’s a time lag there in a minute, but that one would think as a function of market balances, supply and demand. But it’s more than that. It’s the speculation. I mean, you often hear politicians complain about speculators, its it’s people, but more importantly, not people, actual machines, computers, A.I., algorithmic trading. That is that is meaningfully impacting the price that we all pay for for oil gasoline.

Ed Morse [00:19:49] Yeah, it’s meaningful doing it. But but other than that, we have to look at supply and demand in a very specific way. So we know that Euros is traded at a discount because people, companies

Jason Bordoff [00:20:03] euros is the Russian Russian export.

Ed Morse [00:20:05] Russian exports. And they’re all euros because they, you know, they blend everything into one thing. But if it is being lifted by the discount, and that’s because the traditional buyers of it are buying rent related crude. So part of the reason Brant goes up is because of this dislocation effect that we see visibly in the discount. There’s a rule of thumb there’s no way to really be precise about a risk premium. The risk premium comes about in several different ways. One of the ways you can measure it is by the discount of euros to to Brant. So I said it was about a $2 discount January 30, $32 discount today, $30 more of a discount basically split that in half. Fifteen dollars of the price of Brant traded is a risk premium price that, when the market sorts itself out, should bring it down. Then you have the incredible volatility in the market. So at the money, implied volatility has had shockingly gone up in a normalized world. Our measures of volatility would be 20 percent. To keep it simple, we’ve had in the last two weeks the volatility in near-term, Brant hitting not as high as the volatility for nickel traded or we traded, both of which have been at 100 percent level. So, you know, there’s clearly risk Premia in those commodities as well. It’s harder to it’s harder to really think about what the risk premium is through the increase in volatility and the changes in what we call vol SKUs. But there’s another number you call it ten dollars, five to ten dollars. So we’ve we’ve got risk premia in the market, partly through the distortionary impact of companies buying grant related crude rather than euros. And then we have the added problem that Brant related crude and also includes Libyan group other light sweet crude and like Brant, and it’s in short supply for domestic reasons. So I think that has to be thought through when you try to think about the medium to long term effects of what’s going on.

Jason Bordoff [00:22:28] I’m wondering if what you’re describing in some sense from a Western nation standpoint is the best of both worlds where you’re continuing to have Russian oil flow to the market so that we don’t see as severe a price impact for the gasoline and diesel we buy. But you’re describing atmosphere of stigma and social pressure that is requiring Russia to significantly discount its oil, to sell it to market. And that’s the financial pain on them without financial pain on ourselves. Is what you’re trying to do when you’re thinking about tools of economic statecraft, is that what’s being achieved right now?

Ed Morse [00:23:03] Yeah, it’s partly being achieved. I think we also have to remember that Urals crude selling like this is a reflection also of the appreciation of the ruble against other currencies. So it may maybe, maybe in in ruble value terms, there is maybe no discount. You know, you have to measure that out, but it depends on how much is being received on the Russian side. But but in general, yeah, the pain is being felt more there than elsewhere.

Jason Bordoff [00:23:37] And I just want to clarify one thing you said because you mentioned storage and I know there’s been a lot of people crunching numbers on how much storage Russia has access to. It would seem to me like you can’t both be dramatically building storage and continuing to maintain exports at roughly similar volumes. But you were describing, I think, storage as maybe a tool for getting oil out into a market through some of these backdoor means. Is that is that is that right?

Ed Morse [00:24:03] Yeah. There are two things about storage. One is how much crude is being stored in this day from the overseas exports. How much is being stored at Williams Harbor and in Germany? How much in Rotterdam? But then it’s another storage issue which people think about in terms of what happened when the British pipeline went down a couple of years ago because of impurities in the line, which backed up into the production system and caused a shutting in of Russian production that could not come fully back because of the damage being done, particularly to old kinds of fields. So there is a concern in the market about the what if? What if Russia does lose two million barrels a day of exports? Is there capacity internally to help alleviate a situation so that Russian production is not shut down completely? And we believe that and these are from documents available publicly from the Transnet pipeline system. They were available publicly, by the way, until a few weeks ago and where they’re no longer available publicly. But they they did indicate that the the Dru’s pipeline incident was the reaction to it was to build storage along the Transnet pipeline system. And then the question is how much storage was built. We estimate that the minimum available storage is about 120 million barrels that could be as high as one hundred and fifty. But the one hundred and twenty million barrels is a convenient number because it means that you can along the Transnet system. If there’s a two million barrel a day loss in the delivery through seaborne exports in Europe, that it would be two million in Europe, that it would take 120 days thereabouts before producers in Russia have to make a decision about shutting in production.

Jason Bordoff [00:26:14] So there was a lot of concern even before the Russia-Ukraine conflict. That we were headed for a supercycle that we were under investing in oil and gas supply demand was growing faster than supply would and we were going to see rising prices. I think you were as having a blast in, Bloomberg wrote. Sort of a lonely bear saying maybe that’s not true. And and a little more sanguine on whether we were going to be facing an oil crisis. Is that still your view and does what’s happening with Russia change it?

Ed Morse [00:26:44] Well, what happens in Russia gives us a caution to think about, but we don’t think there’s a high probability of that affecting the market in 2022. So what we were saying at the time was that we perceived that with the pandemic recovery and economic growth from the recession, that the world was going to see around three, three and a half to three point six million barrels a day of demand growth. Our number on that was much lower than the number from the OPEC secretariat, which still in the most recent monthly report, has 4.2 million barrels a day of demand growth. So when we look at demand growth, we think of a 3.5 3.6 is at the top. The IEA, the EIA are lower than we are. Ours is based in part on a higher level of GDP growth than the world is likely to have. Indeed, we know that it is highly unlikely for European GDP to grow by 2.2 percent is probably highly unlikely for it to grow by one percent. And either it’s going to be zero negative or very low, like 0.2 of 0.3 percent growth in demand. So the world has to believe. I think that the hit on GDP growth is going to be great. The world was thinking that there were two major economies, the two largest in the world, the U.S. and the Chinese economy. They were going to have spectacular growth in 2022, and we no longer believe that, particularly in the case of China, where there’s been to the Chinese New Year, no dramatic increase there and in fiscal measures that would let you think that they’re going to really be able to reach their target of 5.5 percent growth. And that has ripple effects, particularly in emerging markets. So the question really is, you know, how much growth is it going to be in the world? We know it’s going to be much less than people thought at the beginning of the year, but demand will not be growing to the degree people thought. Then there’s a supply side where people thought that our supply numbers were a little bit toppy. We don’t think they were not happy at all in that we think they might have been understated. And I’ll tell you why we had. We had U.S. growth of one point three million barrels a day, 500000 of that angles, 800000 of that crude oil. And that was before we saw an acceleration in rig utilization in the United States and pressure being put on companies either by greed or by shareholders to to drill more and to produce more. So it now appears that 1.3 million barrels a day for the U.S., maybe one two or 300000 barrels a day shy of where the actual number will be. By the time we get to the end of the year, we had Canadian production up about 250000 a day. We know that the Canadian companies are reevaluating that, given how profitable it is to increase the machining nature of the machinery like nature of the manufacturing, like nature of oil sands. We also had kind of realistically, unlike others, Mexican production going up. Mexican production rose 100000 barrels a day last year. We look at the rig count in Mexico. There’s no reason for it not to have another 100000 barrels a day of growth. We look at Guyana, Suriname with 200000.

Jason Bordoff [00:30:25] And just to put these numbers, just for these numbers in context, you know, you talk about a million a million half in the U.S., U.S. grew from around five to 13 million barrels a day and then fell to about 10 in the pandemic, back to somewhere just in the middle there, like 11 and a half now. Just putting in context of what those numbers mean, right?

Ed Morse [00:30:44] The numbers mean that the U.S. gets back to that 13 million barrels a day monthly peak that we were at in the winter of 2019 2020. It gets back to that number in the winter of 20 to 23. And and then in the year 2020 three, the momentum built from that as another million barrels a day to US production in 2023. So yeah, that’s where we are.

Jason Bordoff [00:31:11] And just to be clear, that’s not because of something Biden’s doing, not doing government policy. You’re just talking about market forces doing what market forces. This is due when prices go up. Is that right?

Ed Morse [00:31:20] Exactly. And and the recovery. You know, people stopped drilling because they they were worried about negative prices in April, May 2020, and they shut down drilling and lived off of drilled but uncompleted wells until they had some certainty about where prices were going to be. So if you have prices in a $20 range, it’s not profitable to exploit shale once you get above 30. Then you start drilling again, get up about 40, 50 or 60, then you drill a lot more. So our numbers were based on a combination of theory. How much is grilled at what price? But also in practice of listening to what companies were giving as far with guidance, listening to the service companies and their announcements about where they thought drilling activity was going to go. And we’re not alone in thinking about that, ironically. And we started with a supercycle thesis. Ironically, we and those who had the supercycle thesis have just about the same view on US production growth. The difference was on the demand side, much more than on the supply side. On the supply side, because you raised the question, we think there was another misperception. I think it’s irresponsible that on the part of people and in the public domain, including at the IEA, Chris saying that hey, hundred and fifty billion was spent in finding and developing oil in 2014 and 2014 was a terrible year because it was too much oil produced. And then this year we’re only having four hundred and fifty billion being spent. But what that doesn’t take into account is the higher efficiency capital efficiency of the spend, because in 2014, we were coming out of a period where the per barrel cost of fighting and developing oil on average in the in the world rose to about $30 a barrel from the six to seven dollars a barrel that it was sad from the late 1980s to the early 2000s. And then we had the cost inflation by the dramatic increase in spending post-2003, which I’m sure you recall well, when people said, Hey, the world is running out of oil in 2019 on a three year moving average, finding and development costs around the world on average had fallen to $30 a barrel and for the year 2019, $11 a barrel against that 30. So if you look at the efficiency of capital four hundred and fifty billion, even if you build a little bit of inflation into it, is the equivalent of eight hundred and fifty in 2014. So we don’t. And then we look at projects unfolding around the world and we count the numbers and we don’t see any impact on the supply side until perhaps twenty twenty four twenty five. And it’s too early, particularly with short cycle oil to actually say this is going to happen. And we’re now actually seeing not only drilling increase on land around the world, including the United States, but we’re also seeing in the last few weeks the deployment of deepwater rigs and shallow water rigs growing as well. So there clearly is now a market incentive to produce more. We didn’t take into account when we looked at projects that have already had reached the final investment decision.

Jason Bordoff [00:34:55] And what’s the role of government in all of this? Obviously, some again on the Republican side of the aisle are saying we’d be growing much faster. But for Biden’s energy policies, and we heard Secretary Granholm at the big CERAWeek energy conference say, let’s get oil and gas production up even more. Is there something the Biden administration is yet has done to constrain production or could be doing to increase if they did

Ed Morse [00:35:17] certain things to restrain it in terms of canceling an offshore sale, the court system revised but also restricting access to federal lands and saying We’re going to be more particular about looking at the environmental safety of this and the other thing. I actually think

Jason Bordoff [00:35:38] production today or like years into the future.

Ed Morse [00:35:41] I don’t think it has any effect on production because of other measures that are taking place. But I think what we’re seeing and where there is hope in my mind and I think there’s hope in yours from other conversations that we’ve had, is that wherever we look, whether it’s Europe or the U.S., there is recognition that the energy transition was in order to get a zero carbon world was rushed into a little bit too quickly without thinking about what you need for resilience in the system for redundancy in the system, including reliance on fossil fuels and to make power generation. Deliver it on a reliable basis, and we have, you know, ironically in the US, ERCOT in Texas, which is the energy reliability company for four transmission, which has been the least reliable of any even reliability in its name. And as we saw in March of last year, natural gas prices rising to close to $900 per million BTU in Texas and over a thousand dollars in Oklahoma. And that didn’t last long. But it shows what happens if you don’t think about sharing electricity with a neighboring state. And Europe went whole hog in moving into renewables without thinking about resilience, reliability and worst case scenario. So they had a reliance on hydro and a reliance on wind. And this is a year where hydropower went down in Europe and the northwest of the U.S., the southwest of Canada and China because there were droughts in the northern hemisphere and we had a hot summer with electricity burn for finishing at the highest level ever. And there was carelessness about making sure there was enough alternative fossil fuels in storage to get through a winter time. So the electricity crisis began before Ukraine, Russia and showed the failure of thinking through what you need to get through the energy transition, causing a lot of internal change. We know about rioting in France, we know about unhappiness in the UK, about subsidies that have to be given across Europe in order to meet household consumption, European electricity prices at the over 250 to 300 percent. And that may not have happened. So I think partly as a result of that. And it may be Europe where the pain was greater. More Europe than the U.S., where the pain was lower to have in place. Now a more sensible way to get through the energy transition and hopefully in the U.S. will be a middle ground that is reached on a consensus of the need for fossil fuels, as well as the benefits of fossil fuels as we are still mindful of dealing with greenhouse gas emissions.

Jason Bordoff [00:38:46] Yeah. As you know, I’ve written about not that this should in any way be an argument to delay the clean energy transition. If anything, what’s happening? I think with Russia, Ukraine is a reminder to accelerate it, but to think about how we get from here to there and the inevitable bumpiness along the way and make sure we develop tools to manage that. That’s not only bad economically and geopolitically, but it’s going to make it harder to get where we need to be in the end for our climate goals if we have problems with affordability and reliability along the way. Absolutely can can. So you’re describing a potential crisis as you as you called it. Not that we have large amounts of Russian crude disrupted today that may happen because of accidents or intentional or unintentional to energy infrastructure. Perhaps the pressure to pull more Russian oil off the market through tools of economic statecraft accelerates or or Russia retaliates? Who knows? But in that world, there’s a lot of speculation about our questions about where. How would we react to that? How quickly can we reduce oil use? The International Energy Agency just put out 10 points about that earlier today or where alternative supplies would come from OPEC countries or strategic stocks. The question the speculation about the Iran deal. Is there enough supply to offset a meaningful amount of of Russian oil being lost to the market? Or how would we cope with a problem like that?

Ed Morse [00:40:18] It’s an interesting question about how cosmopolitan the U.S. wants to be about global responsibility. So let’s take a look briefly at the at the natural gas market. So we know that the limit on the picking up prices in the U.S. is directly related to the capacity to ship LNG out of the country. We produce more gas than we have facilities to convert to liquefied natural gas and export, so we have a. As a result, when prices are higher in the rest of the world, the U.S. economy is basically insulated from that. We have, you know, for 50 dollars per million BTU Natural Gas Europe has $60 per million BTU natural gas. China has $35 per million BTU natural gas. So we’re, you know, we’re in a significantly better position than any other major economy. It is a global economy. And while I don’t recommend that we do the same thing and you know, you and I met in part over issues related to U.S. exports and and the availability of them. But if the U.S. had the same export restrictions now that we had before 2014, then our oil prices would be significantly lower than the oil prices in the rest of the world. And that and I really mean significantly lower, you know, I’d imagine if I think it through. Yeah, refineries might not like relying on on light sweet crude where we can, you know, export easily three million barrels a day. If we restricted that, the price would simply go down and the price of gasoline would go down. Not that I recommend it, but if you just think of the analogy with the natural gas market.

Jason Bordoff [00:42:18] And just to be clear, you wouldn’t recommend it because lower prices sound better than higher prices. What’s the downside?

Ed Morse [00:42:24] Well, I think the downside is it’s less efficient. It’s good to be an exporter and importer. I think the influence that you have on prices is greater when you’re actually the world’s largest hub, as the U.S. is the largest hub for buying and selling products, for importing and exporting products and importing and exporting crude. And I think that has really significant advantages. But yeah, the oil market looks on the face of it to be better positioned for getting new supply into the market. There are plenty of places around the world out there the middle. Some Middle East countries are restricting their ability to put a lot of oil in the market very quickly. That’s a political issue more than anything else. And the politics around that, as I need not tell you, have a lot to do with Iran and have a lot to do with the the decision that the Biden administration made early on to restrict arms sales that facilitated what was going on in Yemen. And the reason they did it was because of the human element of people being killed in Yemen, thinking that that loss of U.S. military equipment could lead to a negotiated settlement. It hasn’t. And and I think had the U.S. not done that and not done some other things, the two major Middle East countries that are engaged in that battle, the UAE and Saudi Arabia, would would have been much more amenable to raising oil production now. So there’s a, you know, a significant link on the security of side of things with the energy side of things.

Jason Bordoff [00:44:17] Do they have much ability to increase oil production or or are most OPEC countries kind of producing close to what what they can? And then you hear this argument that even if they produce everything they can, that’s not even good for oil prices because there’s no there’s no buffer anymore. There’s no margin for error, there’s no spare capacity. And commodity traders get nervous about that.

Ed Morse [00:44:37] They do. But they not every period in which we’ve had low spare capacity has been a period of of of really low prices. Indeed, when some Middle East countries were producing a lot more than they otherwise might have been, particularly in 2014 fourteen, the world had very limited spare capacity, but it had prices going down rather than prices going up. I think I think the context has to be what is the production growth that lies ahead? We have not wavered much in our view that there are seven million barrels a day and more supply to the degree we wavered on it. It’s about a half a million barrels a day of less Russian supply coming out of investments in Russia. Not from anything else. But we also think about demand going up by half a million barrels a day less than we did when we thought there was going to be seven million barrels a day of supply. So, you know, we’re looking still at a build out of inventories between now and the end of the year. And I think it’s going to be starting pretty soon as we move into refinery maintenance season and into low demand may. And the inventory levels had been very low lower than people said. I think in part lower because internal disputes within OPEC led them to stop thinking about themselves as a central banker of oil, adding liquidity and taking it away when needed, but instead going to a pro-rated monthly increase. If they kept the central bank role, they would be producing more, I think, than they are now. But we need to think through now, where is inventory going to be at the end of the year? And it looks in all likelihood to us that we’re going to be having upwards of a two and a half million barrel a day inventory build by the fourth quarter. When you look at some of the things coming out of the supply side that I mentioned in the Western Hemisphere, when you have an increment, a biofuels coming about because of incentives to change refineries in the U.S. and Europe in particular from making product out of crude oil, making product out of waste material, more sustainable fuel and the no, it’s not a low number. When you have more natural gas liquids, they are liquids and they’re growing significantly from the U.S., but significantly from other countries as well. And we have higher level of refinery activity so that the processing gains per barrel have to be added up. It’s not simply what is the U.S. producing? What is Canada producing? What is Norway producing? It’s the biofuel side. The natural gas liquids side. And it’s the refinery capacity utilization, which gets you to that high and higher number.

Jason Bordoff [00:47:32] And what about strategic oil stocks? Should the U.S. be releasing the SPR right now?

Ed Morse [00:47:37] Yeah. So I actually don’t think this is the best moment for doing it. I would, you know, I think I think that we have the possibility. The threat of invoking the government invoking the Defense Production Act is complicated. I don’t think we have time in this podcast to talk about it. But if if there was a link to, hey, we’re dumping one hundred and fifty million barrels out of the spot now and we’ll be buying it back and we have the forward curve in steep backwardation makes it really attractive looking for the market to take it. And if you kind of linked it to

Jason Bordoff [00:48:21] and that that means the price of oil today is higher than the market thinks it’ll be in the future.

Ed Morse [00:48:26] Right. Absolutely. Is significant because it’s very steeply backward dated. And yeah, if you kind of locked in a lower price now, which you could do in the market or gamble that the price is going to be even lower than what the market is saying, it would be a good deal for you paying back at a price you can lock in now on future delivery. If that were somehow linked to the Defense Production Act, maybe there would be more convincing way to get companies to accelerate their drilling activity.

Jason Bordoff [00:49:00] Can you? I’m not going to. I’m not going to tell everyone how long you’ve been doing this, but you were doing something similar to what I’m doing. I think for part of the 1970s energy crisis and then serving in government for for part of it. Just put this in historical context like what? What the similarities and differences are when one uses the phrase energy crisis today versus what? What we saw then, is it? How is it similar? Has a different? Is it going to be better or worse?

Ed Morse [00:49:28] I think it’s similar in the sense that, you know, prices are going to go up and they stay after a longer period of time. But we’re talking and, you know, to be blunt about it, we’re talking about prices going up. And I’m not a believer in the sustainability of $140 a barrel, but you have to depend, you know, it depends on where you think fair market value was in like December. And I think fair market value was absolutely at the 80 plus dollar a barrel level, given higher demand than expected and lower production than expected this past winter. So we have a tight winter market and prices may double from 80 to 160. We had in the OPEC events in set 1973 74. We had a four to five fold increase in prices. Yes, that’s right. So we had a 400 to 500 percent increase in prices. Just to give you the dimensionality of then, there were two other features in play that are not in play right now. The U.S. had been a high cost, the largest producing country in the world, a high cost producer. And in order to protect American production, we put in place high tariffs of quotas on imports from outside. And there were a couple of events that happened. The U.S. dollar lost its link to gold by President Nixon in the middle of August. In nineteen seventy one that started an inflationary cycle. That was understandable. But as a result of that, the U.S. put in price controls and the price controls got very sticky. So we don’t have anything like

Jason Bordoff [00:51:13] and and just. Am I right that even before the Arab oil embargo of. Late 1973, there were concerns, even that summer, about shortages of gasoline supply in the United States, in part because of the policy decisions you’re talking about.

Ed Morse [00:51:26] Yeah, exactly. And then when I was in the government, you know, the the decision was made to decontrol prices. But then in the meantime, because there was something called the crude oil equalization tax that only historians of this actually teach. And it meant that if you were an independent refinery and had access only to U.S. price control crude, you were able to buy a lot higher priced foreign crude and get access by law to the U.S. lower priced crude. So you had an incentive to import high priced crude to get low priced U.S. crude, which became an incentive to import a lot. And on that score, there is no accident in my mind that the controlling of prices turned an inflationary environment into a non inflationary environment. And yet in the Carter administration where I served, that I also served in the Reagan administration. Carter got it almost there. And then the first day of the day of the inauguration, Reagan President Reagan control the oil prices overnight and it said something else, but there’s something else that’s different, maybe even more significant, which makes the comparison to the 73 74. Totally and utterly irrelevant. And that is we had the nationalization of two thirds of the oil produced in the world. And if you think about supply chains and that’s a very, you know, topical subject, if you think about supply chains and the problems we’re having with them now, think about this supply chain. They had seven companies, actually, there were eight of them that controlled production, delivery, distribution. So if you were, I’ll make it up in Peru or in Brazil, a bigger case and you were relying on the seven or eight sister companies to delivery. You didn’t have to care about how much inventory you had. And then all of a sudden, the supplier of your crude no longer had the crude to supply. So you had to build inventories at home. And one of in my mind, the biggest factors in the jump in oil prices and its sustainability in through 1981 was that inventories around the world at a time when. Demand actually stagnated, so, you know, grew from 60 million barrels a day in 1973 to 65 billion a day in the 19 1980. You had a doubling of the inventory in the world, so the demand for inventory went up. And and that was a function of the lost supply chain of the seventh sister company. So that’s not going to happen now because the world is already there in terms of not relying on a small group of companies to provide the fossil fuels you need for transportation, for power generation, for industrial activity, for agricultural activity.

Jason Bordoff [00:54:32] And let’s go from the 1970s to literally today when people are wondering why oil prices are falling, but their gasoline prices aren’t falling yet. Is it because of market power and collusion and price gouging? Or is it something else?

Ed Morse [00:54:47] Well, I think it’s about the momentum involved, and the price of gasoline is a function of what the price of crude oil was and a function of where refinery margins are. It’s also there’s something very different now that we did see then, and that is that on the supply chain side, shipping costs have gone up a lot and they’ve gone up a lot because of the risks associated with lifting Russian oil or the perceived risks. So, you know, you have shipping costs all of a sudden and tanker rates are up by 10 percent. That is also a function of where gasoline prices are.

Jason Bordoff [00:55:24] Can you say a word about how what you think the broader geopolitical fallout from this will be with regard to energy? Obviously, there will be other aspects as well. But when you think about the relationship between China and Russia in an oil and gas, maybe what you see within OPEC? What do you think the consequences of this will be recognizing? We’re still less than a month into this conflict.

Ed Morse [00:55:48] Listeners of this will have no idea what it is, but I sent you an article earlier today on some geopolitical issues in which there was a total cut off of Russian crude from the outside world. Another action like what happened after the collapse of the Soviet Union, where Russian production collapsed by five million barrels a day. I wouldn’t say that’s probable, but it is certainly a potential factor in the economic isolation of of of Russia, which would have no pretty negative consequences when you look at other people’s objectives. Certainly, China has geopolitical incentives to balance out its rivalry with the United States as the largest economy in the world. It actually sits historically, as does Russia does on a bunch of historically driven weaknesses. The biggest weakness being demographic, a weakness that we don’t have. So there are fragilities. Built into what people talk about with respect to a new alignment alliance between China and Russia that is divorced from that with the rest of the world, what China is clearly discovering is how integrated the Russian economy has been with the world economy and what the consequences are of the rest of the world economy. Deciding to divorce itself from a country that has an economy so, so sensitive to and dependent upon exports of raw materials to the rest of the world. So I think there’s a cautionary tale there. I think the Chinese authorities certainly recognize that they are a global country in a globalized society. They may want to insulate themselves from that a lot. They’ve been insulating themselves from it by intentionally discovering, unintentionally discovering that they had the largest foreign exchange reserves in the world. When you look at the advantage of that, when it comes to your flexibility, particularly if nobody is going to bar you from using those resources that may be partly available in foreign banks that earn more money. But you know, I think I think the geopolitics are not insignificant. We’re not going back to the world before we’re going back to a world that we’ve already seen in which defense spending is a good thing we’re seeing. On top of that, you probably want to raise with somebody else when there’s more time ESG and the G side of ESG, including human welfare and and human security, which means that it’s a good thing to increase defense spending and a good thing to invest in in weapons if they’re put to the right kind of use. So I think that’s that’s kind of durable and maybe it’s making up for a weakness in the past, but we’re not going to return to 2021 anytime soon. And it may be a decade before we get a resurgence of globalization and we might not get it at all. So I think that that’s one big issue on the geopolitical front.

Jason Bordoff [00:59:14] We’ve been taking up way, way more of your time then than I know you have available and you’ve been incredibly generous with it to help us understand what’s happening. Just with the oil dimensions of this potential energy crisis, we need to have you back to talk about gas and coal and so many other commodities, which I know you’re following really closely as well. But thanks for making so much time to be with us today on Columbia Energy Exchange.

Ed Morse [00:59:35] It’s good to see you too. Thanks for having me, Jason.

Jason Bordoff [00:59:41] Ed Morris, thank you again. Thanks to all of you, our listeners, for joining us on this episode of Columbia Energy Exchange. The show is brought to you by the Center on Global Energy Policy at Columbia University. The show is hosted by me, Jason Bordoff and by Bill Loveless. The show is produced by Steven Lacy and Jamie Kaiser and Alexandria her from PostScript Media. Additional support from Tori Lavelle, Lilly Lee, Kirsten Smith, Daniel Prop, Natalie Volk and Kyu Lee. Sean Marquand engineered the show. For more information about the podcast or the Center on Global Energy Policy, please visit us online at Energy Policy de Columbia Dot Edu. Or follow us on social media at Columbia New Energy. And please, if you like what you heard. Give us a rating on Apple Podcasts. It really helps us out. Thanks again for listening. We’ll see you next week.

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