Energy Policy:

CSIS senior adviser Caruso discusses impact of Obama administration on energy policy, prices

With senior advisers to President-elect Barack Obama already signaling that he intends to overturn some Bush administration decisions, including the expansion of oil and gas drilling on public lands, how is energy policy expected to shift over the next four years? During today's OnPoint, Guy Caruso, a senior adviser at the Center for Strategic and International Studies and a former administrator at the Energy Information Administration, discusses his expectations for the Obama administration's approach to energy policy. Caruso talks about the impact of the credit crunch on domestic and international oil projects and also gives his short- and long-term predictions for energy prices.

Transcript

Monica Trauzzi: Welcome to the show. I'm Monica Trauzzi. With us today is Guy Caruso, a senior adviser at the Center for Strategic and International Studies and a former administrator at the Energy Information Administration. Guy, thanks for coming back on the show.

Guy Caruso: Good to be here, Monica.

Monica Trauzzi: About a week into President-elect Obama's transition. What's your reaction to his election and how can he make the most out of this transition in terms of energy policy?

Guy Caruso: Well, I think in terms of the election the fact that he carried so many states and a strong majority in both House and Senate, even though there's some seats still to be decided, I think bodes well for his ability to pass some of the energy policies that he has been proposing on the campaign trail. So it's a real issue now of course, translating those promises and proposals into actions.

Monica Trauzzi: Is there anything specifically that he should be focusing on during this transition period, on energy?

Guy Caruso: Well, I think, the good news is that with oil prices and energy prices in general falling since really August that helps a bit with the financial issues. And that is that, in effect, it's like a tax cut when the average consumer now fills the car up for $40 instead of $60. So, that's part of the package I guess as he thinks about the broader financial reforms and broader financial package needed to get us out of was probably most likely to be a recession. The energy prices are actually a positive thing, but beyond that, it seems to me, where energy falls in the priority is also important. He's got to deal with the financial crisis, obviously, very quickly. But there are some issues such as energy efficiency, renewables that have been very high on his agenda that maybe there's a way of combining them with the package, with that financial package.

Monica Trauzzi: There's some negatives also associated with the falling energy prices as well.

Guy Caruso: Yes.

Monica Trauzzi: And people are maybe less concerned and they fill up their tanks more readily and easily.

Guy Caruso: Exactly, it's going to be much more difficult to get the attention, particularly of the politicians whose votes he's going to need, even from his own party. I mean even with a larger majority than existed in the previous Congress, he still may have difficulty getting things like a renewable portfolio standard through, which wasn't that many votes short under Bingaman's proposal, that kind of thing. So, it's a two-edged sword and that's going to be one of I think a real policy debate that will take place I believe in these coming weeks, even before inauguration.

Monica Trauzzi: And one of the things we heard about a lot during the last session of Congress and we're expecting to hear more in the next session of Congress was offshore drilling.

Guy Caruso: Yes.

Monica Trauzzi: Would you expect Obama to reinstate some of the offshore drilling bans? We're already hearing that he'd like to do that in Utah. Are you expecting that he sort of might want to backtrack on some of the things that Bush has done?

Guy Caruso: I'm not sure. He actually shifted his position at a bit during the campaign to be at least partially in favor of some of the offshore drilling, with states, of course, having a say in that. Clearly, he's not going to move on ANWR for example. But there are some others where he may use that as perhaps some bargaining chips as they go into these negotiations, which I'm sure will be coming.

Monica Trauzzi: What do you think the effect is of the credit crunch on offshore drilling projects and being able to get these things off the ground even?

Guy Caruso: That's very important. You know, a lot of focus has been on just opening up, but indeed, the companies, many of the companies that are drilling both onshore and offshore are having trouble getting credit, especially independent oil and gas drillers and exploration companies. So I think now that at least the liquidity seems to have eased, that might improve, but in the last couple of months I have been hearing from independent companies that they've been having trouble getting access to capital. And so you could even see a situation where there's opening up of acreage and a slow response to that because of the credit crunch.

Monica Trauzzi: Obama has signaled that he'd like to create 5 million green jobs and that might be one of his longer-term goals. But there are some people in the petroleum industry and other carbon intensive sectors that say, sure, you might create 5 million green jobs, but we're going to lose jobs in our sector. So, do you see some balance that needs to happen there as well?

Guy Caruso: Oh, I think so. I think there's a lot of political sloganeering that went on, on both sides in the campaign. And I think now reality sets in. I mean 5 million jobs is a huge number of jobs. I mean the petroleum industry was saying that when prices fell dramatically in the '80s and into the '90s, they lost, I don't know, 450,000 jobs. Some of those have come back, but the magnitude, the scale of that, the 5 million number seems awfully aggressive and, therefore ... but if indeed there is either tax policy or other regulatory policy that affects not only oil and gas, but also the coal industry, you could see, certainly, some loss of jobs there, right? But what I'm hearing is more pragmatism as they start turning to, OK, let's get real. What can we really achieve in the context of a financial tightness that they've got to deal with first?

Monica Trauzzi: The international energy discussion continues to be a pretty delicate situation. How should Obama be approaching countries like Venezuela and Saudi Arabia, keeping in mind the energy angle of the discussion?

Guy Caruso: Well, they're going to remain very important suppliers to the U.S., both Saudi Arabia and Venezuela are in the top five.

Monica Trauzzi: Right.

Guy Caruso: And I don't think that's going to change too much in the near term. I mean there was, again, this political slogan about we're going to cut our imports of Middle Eastern plus Venezuelan oil to zero in, I think, 10 years or something. It was a relatively short period of time. Again, fairly meaningless because the main thing is focusing on energy efficiency and, OK, reducing oil consumption is a positive goal. Where that oil comes from, because there's a fungible global world oil market, doesn't mean very much. I think continuing to have good relations with all the major suppliers of energy, I think, is imperative.

Monica Trauzzi: I wanted to revisit the issue of energy prices that we discussed before. There are a lot of questions as to why prices have dropped down pretty dramatically from where they were this summer. Is it due to basic supply and demand or are there other factors coming into play that have caused the prices to drop?

Guy Caruso: Well, I said consistently during my time as administrator to the question of speculation and financial investments into commodities that we could explain most of the run-up in prices in the five or six years previously to the fundamentals. Although, other factors clearly are playing some role and I would say similarly now that most of the decline, I think, is directly tied to the weak global economy. Even though we haven't seen the numbers specifically yet, we do see them in the U.S. and we're down about a million barrels a day in consumption so far in '08 compared to the same time in '07. And I'm sure when we see the final numbers for the E.U. and Japan they'll be down this year. And we're also starting to see weakness in some of the emerging economies, which would really be big news because most of the growth in the last five or six years has been from these emerging economies. But you're even starting to see some signs of that in China and you're seeing this stimulus package being introduced there to boost their economy. So, I think it's largely demand driven and that also certainly some of the investments that went into commodities and now rapidly coming out, probably are accelerating the decline. But I don't think they're the leading cause of it.

Monica Trauzzi: Will bring more forms of alternative energy online help stabilize those prices of it? Do you think that's going to have an impact?

Guy Caruso: Well, I think over the long term definitely. That's where we're headed I think almost under anyone's expectations. Both Obama and even the McCain said we need to do, well, kind of all of the above. And the Obama promises for efficiency and increased renewables, I think, over the long term are the key to this transition, although it may be decades, and I know it's difficult for politicians to deal in terms of decades, but it certainly will help. But it's not going to help in the winter of '08-'09.

Monica Trauzzi: Right.

Guy Caruso: But certainly over the coming years.

Monica Trauzzi: Final question here. I know you don't want to predict prices because they tend to fluctuate so much, but where do you expect prices to go short term and long term? Particularly with a new president in office, what do you expect the market to be doing?

Guy Caruso: I think that the market has more downside potential than upside potential over the next 12 to 18 months. So, I mean, it's roughly low 60s for crude oil today. It could go $10 or $20 lower than that before it bounces back. But I don't think it would stay there very long because over the longer term we still think there are problems in terms of getting enough supply because of the above-the-ground risks, whether they be in Venezuela, the Middle East, or Russia. So, I think, we're perhaps in for another cycle of low prices, relatively low prices from what we've seen, but a bounce back within, I would say within two to three years because of the cycle that that sets in motion. You mentioned consumers and politicians thinking, well, if the prices are going to be low again we won't need to worry about it. Consumption increases again and I expect we'd have strong growth in emerging economies and difficulty coming up with enough oil quickly to keep the price down. So I see a bounce back.

Monica Trauzzi: Okay, we will end it there on that note. Thanks for coming on the show.

Guy Caruso: Thank you.

Monica Trauzzi: And thanks for watching. We'll see you back here tomorrow.

[End of Audio]

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