Monday, May 26, 2014

Book Review: “The Quest” by Daniel Yergin (2011)

It’s the long-awaited sequel to the best book ever written about the impact of petroleum on humanity; and yeah, it’s probably the best book about energy security and production you’ll read for the next 40 or so years.

In 1991, Daniel Yergin -- a Yale and Cambridge-educated economist -- released “The Prize: The Epic Quest for Oil, Money and Power.” The one-thousand page, exhaustively researched history book has since been called the “bible” of the oil industry, and in 1992, it earned Yergin a well-deserved Pulitzer Prize for General Nonfiction.

Covering nearly 150 years of petro-history, “The Prize” covered just about every aspect of oil production imaginable, from its discovery in Pennsylvania in the mid-1800s by people who first wanted to use it as a precursor to Orajel all the way up until the first Gulf War. In the book, the central thesis put forth by Yergin was virtually incontestable: that the very trajectory of humanity itself, more or less, has been completely dictated by oil since at least the ass-end of the 19th century.

Oil was the veritable lifeblood of the Gilded Age, the fluid that created the most domineering and oppressive monopoly in U.S. history. It was also the unstated variable that swung World War II in favor of the Allied Forces -- lest we forget, both Germany and Japan saw their fuel supplies (and with it, their mobilization capabilities) virtually depleted prior to D-Day. It was the substance that allowed cross country, and then cross continental, travel to become a reality; as Standard Oil served as a boot on the back of the American labor force, by the 1950s, King Gasoline had become the great liquid liberator that allowed the American middle class to arise and prosper. Soon, oil became the embodiment of modernization itself, an economic necessity that ultimately became the anchor point of virtually all geopolitics; indeed, even now, the world economy hinges less on GDP than it does mbd (that is, millions of barrels produced daily.)

The thing that makes “The Quest,”  the sequel that took Yergin two whole decades to write, so interesting is that he isn’t preoccupied with predicting short-term petro-politics here, which, needless to say, would’ve been a much easier book to pen. Sure, there’s quite a bit (actually, several hundred pages, really) about the near-future of hydrocarbons in Yergin’s 2011 tome,  but at the end of the day, “The Quest” is much more focused on what the post-oil world will resemble than anything else.

At the core of the book is more or less the exact same thesis that Thomas Friedman posited in his 2008 pro-green-energy manifesto “Hot, Flat and Crowded.” Alike Friedman, Yergin believes the global economy of the not-too-distant future (nearly doubling, he predicts, to entail $130 trillion annually by 2030) will hinge on two focal points: first and foremost, how the world of tomorrow is going to meet the increased energy demands of  a good 2 billion people soon expected to enter the consumer class, and much more importantly, what sort of energy solutions will be available as technology increases and natural resources -- for the most part -- tend to vanish.

Of course, Yergin ain’t exactly the same kind of hippie-dippie liberal type that Friedman is, and as such, he very, very convincingly explains to us how new technologies, in tandem with exploration of as-yet untapped natural resources, will keep the Oil Express chugging along for at least another 50 or so years -- if not longer. But before we get into the futuristic-sounding stuff, Yergin feels fit to give us a primer on what today's energy markets look like -- you know, so we know what we're working with and stuff.

Rather fittingly and eerily timely, "The Quest" begins with a look at Russian's post "nuclear power in anarchy" 1990s phase. With the fragmented shell of the U.S.S.R. basically running on the bartering system, Yergin describes how Decree 1403 privatized the Russian oil industry, creating virtual oligarchies throughout much of the Russian countryside once the foreign investments started rolling in. Corporate mergers and even transnational exploration agreements follow suit; since the book's publication, it is perhaps worth noting that Rosneft acquired TNK-BP -- a consolidation that makes the majority-government-owned group the single largest publicly traded oil company in the world.

From there, Yergin talks about competing Russian, Iranian, Turkish and U.S. interests in the Caspian Sea region -- primarily, the mostly untapped resources in Azerbaijan, Kazakhstan and Turkmenistan. The area's ACG field, Yergin reminds us, is the planet's third largest oil producing field, while the neighboring Tengiz and Kashagan fields remain relatively untapped.

Then, we hear about the 1997 Asian Economic Crisis, which as readers of "The Lexus and the Olive Tree" are already aware of, is more or less the true starting point of the late 2000s global recession. Yergin describes the impact of the "Jakarta Syndrome" in which oil producers decided to amp up production in the face of declining consumer demand. While oil consuming countries witnessed prices drop dramatically, the after-effects for third-world oil exporters was downright cataclysmic -- Russian stocks dropped by 93 percent, while the impact came *this close* to bankrupting the entire nation of Brazil.

This, of course, lead to the era of the super-merger. BP acquired Amoco in '98, with ExxonMobil forming shortly thereafter. In France, TotalFina and Elf consolidated in '99, with Chevron and Texaco merging in 2000. Conoco and Phillips would then merge in 2001, creating the world's largest "pure-play exploration and production" company.

Yergin then gives us a brief summary of how Hugo Chavez rose to power and turned Venezuela into pretty much the textbook definition of a "petro-state." He then talks about how a series of "aggregate disruptions" -- 9/11, unrest in Nigeria and Venezuela, Hurricane Katrina and especially the Iraq War -- turned the tides, so to speak, for oil exporters after a good decade of low gas prices for oil-dependent nations.

And here's where the perfect shit storm comes to a head; you see, from 2000 until 2010, world oil demand shot up 12 percent, with a good 50/50 divide among developed and developing countries. From 1999 to 2002, Yergin tell us that the average world demand was 1.4 million barrels per day (mbd). But from 2003 to 2006, that demand increased to almost five mbd. And then, speculators started purchasing derivatives like there was no tomorrow, resulting in a "hyperappreciation in asset prices" around 2008. Unless you've been living in a cave for the last six years, what happened next doesn't really require  an explanation.

Needless to say, the downturn decimated both the U.S. airline and automotive industries, giving a considerable leg up to developing world economies -- in particular, that funny-looking country over there next to Japan with the Guangdong Province in it and whatnot. Indeed, shitty times followed for Americans, but the ball was just beginning for OPEC: it's wealth went from $243 billion in 2004 to nearly $700 billion just three years later.

Yergin devotes an entire chapter to the rise of China, and it's a section well worth reading, even for those of you that don't give a shit about energy policy. So, PetroChina goes public in 2000, and by 2010, its market capitalization had grown a brain-melting 100 times over. Competitors Sinopec and CNOOC also went public, and China -- with its impressive 50 percent urbanization rate -- is now the world's second largest oil importer. By the end of the decade, Yergin tells (warns?) us, they very well could be numero uno.

Of course, China's prosperity hinges on a runaway train model that absolutely necessitates exponential economic growth; Hu Jintao's unbelievably ambitious plan requires 25 million new jobs be created annually to maintain both development and social stability, and as George Friedman fans can tell you, China indeed has some infrastructural problems that are definitely worth taking into consideration before being automatically hailed as the new global superpower. Not surprisingly, Yergin expects China's oil demand to grow phenomenally into the 2030s and 2040s -- as such, an energy agreement with natural gas-rich Russia is an almost inescapable reality.

There's a tremendous passage about how"Iron Man" Wang helped establish the Daqing oil field , which is a story so great I will allow you do your own homework on it. Yergin also lets us know that Deng Xiaoping never actually read "Das Kapital," which probably explained why he vouched for China's economy to be anchored around "petroleum export-led growth" in 1975.

While China is still heavily dependent on coal (its responsible for a good 70 percent of the nation's current energy), China has already become the world's fifth-largest oil importer, with major assets in Kazakhstan, Turkmenistan, South America and especially Africa -- and per, Yergin anyway --possible interests in Iraq. With GM selling more cars in China than the US and China-based Geely purchasing Volvo in 2010, Yergin says that China's future hinges largely on how its able to manage energy efficiency, especially its investments in alternative energy sources. Oh, and since Japan and Taiwan are kinda' next to the South China Sea, the area COULD prove itself to be a critical military flashpoint...someday.

Yergin devotes another huge chunk of his book to peak oil concerns, stating that "above ground political risks" remain bigger concerns than the possibility of the planet "running out of oil" anytime soon.

Giving a subtle "fuck you" to M. King Hubert and his contemporary, doomsaying followers, Yergin notes how the global oil industry rebounded from "supply erosion" in the 1880s, the 1910s, the 1940 and the 1970s, further arguing that technological advancements in drilling and mining, the goddamn massive Ghawar field in Saudi Arabia and a marked increase in liquid petroleum production -- which he estimates could top 114 mbd by 2030 -- ensures that we ain't going to have to go all "Road Warrior" for a couple more decades, at the least.

For Yergin, the name of the game here is "unconventional oil resources" -- i.e., non-crude petroleum. Already representing 27 percent of total world oil production (TWOP), he sees technological advancements in offshore drilling opening up new underwater oil platforms, while harvesting of gas-related liquids could feasibly represent 15 percent of TWOP by 2030. The exploration of "outer continental shelves" could result in huge oil discoveries, with Yergin referring to non-explored regions off  Brazil, West Africa and the Gulf of Mexico as a "Golden Triangle." Of course, Yergin does address the Deepwater Horizon spill (did you know the protective pincers fell just three inches short of preventing the Gulf spill altogether?) but hey! That just opens up new opportunities for containment companies, he reminds us, and if you're that much of an environmental worrywart, there's still the massive presalt deposits in the Santos Basin fields, too.

Obviously, any discussion of unconventional oil resources leads to a discussion of the Keystone XL controversy, and Yergin makes a damn fine argument in support of the U.S. taking advantage of Canadian oil sands. The Alberta tar sand fields represent the third largest known oil reserves in the whole freaking world, with an estimated 90 percent of the field still untapped. Of course, CO2 concerns and pesky Canadian legislation could muddy the proverbial waters here, but per Yergin, the sheer scope of the potential Athabasca reserves is something well worth pursuing, or at least deeply considering. Yergin also reminds us there's a lot of untapped non-conventional oil resources in Venezuela's Orinoco Oil Belt, but since it's in Venezuela...well, yeah.

And then there's oil shale (the U.S. alone, Yergin tells us, may be home to up to 6 trillion barrels), kerogen, synthetic fuels derived from coal and natural gas and "tight oil" exploration in the Williston Basin and the Eagle Ford Formation in South Texas. Horizontal drilling and hydraulic fracturing (not at all a controversial practice, obviously) COULD amp up U.S. oil production by as much as 5mbd by 2020, Yergin predicts: even more amazing, he projects nontraditional liquids to represent a THIRD of the total global liquid oil capacity by 2030.

A gargantuan chunk of "The Quest" is dedicated to energy security, with an emphasis on cyber-attacks, grid vulnerability (just ask the 670 million or so Indians who lost power in 2012) and supply line chokepoints. Then we get some primers on the big dogs. Saudi Arabia -- home to about a fifth of the world's known oil reserves and the single largest oil company in the world -- gets a lot of ink, as does Iran, and its wacky uranium enrichment ambitions. And then we learn that Australia's liquid natural gas production might just surpass Qatar's in just three years' time,  and that there's a strong likelihood that shale gas will represent two-thirds of all natural gas production in the U.S. by 2032.

After that, Yergin gives us a brief history of U.S. energy production. We start with electricity and Sammy Insull being the least reputable person in history, and then we turn our attention toward Hyman Rickover and nuclear engineer Jimmy Carter. Yes, THAT Jimmy Carter, believe it or not. Then, he tells us how the Chernobyl disaster eventually lead to the Shoreham Plant in Long Island being sold for ONE U.S. dollar. Oh, and France's nuclear investments resulted in it becoming the world's largest energy exporter, or something like that.

Yergin goes in depth with the California blackouts that assailed the Golden State in the early to mid 2000s, explaining how "public utility commissions," "avoided costs" and "wholesale/retail disconnect" led to one of the greatest infrastructural SNAFUs in modern U.S. history. All you need to know here? Under California policies, the utilities companies were being charged ten times as much as costumers to provide energy, and while Gray Davis and his kindred were quick to blame out-of-state providers like the soon-to-be-reviled Enron, it was indeed local providers like the Los Angeles County Department of Water and Power that were charging the highest rates of all!

Since 10 percent of all capital investments in the U.S. are in power infrastructure, Yergin takes some time to describe our contemporary energy source options. While 25 percent of the world's coal supply is right here in the U.S., 2012 EPA regulations, per Yergin, made the construction of new coal burning plants virtually impossible -- indeed, Carbon Capture and Sequestration mandates would more or less double the cost of plant construction all by itself. Of course, there are blueprints out there that would reduce SO2 and other particulates, and some proposals have even vouched for the underground storage of CO2 in liquid states, but Yergin thinks these ideas are just too pricey and impractical -- not to mention possible environmental disasters in the making.

On the subject of U.S. nuclear investments, Yergin said that Nuclear Regulatory Commission licensing -- at about $500 million -- pretty much makes the idea of new nuclear power plants unviable (although Southern Company has been in the finalization stages of constructing a few new plants in Georgia, however, for several years now.) Furthermore, terror and reprocessing concerns make nuclear power investments, stateside anyway, less than secure bets, even though China, Russia, India and South Korea have all made decisions to invest in nuclear energy. Obviously, the Fukushima Daiichi disaster has slammed the breaks on worldwide nuclear development, with China and the E.U. since implementing stronger stress tests and enforcing greater regulatory oversight of its existing plants.

And then, we get to the part of the book about climate change, which is mostly a timeline of greenhouse gas discoveries and cap and trade proposals. As a reference source and a legislative summary, it's pretty interesting, but its definitely one of the least intriguing aspects of the book as a whole. After that, though, it's time to talk about "new energies," and the book picks up considerable steam from there.

By 2011, 37 states and D.C. have renewable portfolio standards, and China has made substantial investments in ""Cleantech," becoming both the world's largest wind energy market and the largest manufacturer and exporter of solar cells. By 2012, Yergin tells us that 14 percent of all venture capital investments in the U.S. are in the Cleantech sector, and that contemporary federal investments in energy R&D is an estimated $5 billion. This leads Yergin to ask the $130 trillion question: in 20 years, how do we move to new energy sources that meet the ever-growing needs of the world economy?

While the failure of Solyndra was a huge blow to U.S. solar investments, Yergin tells us that concentrated solar hybrids -- alike those promoted by Desertec-- could become more viable as alternative energy sources in the upcoming years. And while the U.S. Department of Energy wants wind to power 20 percent of the nation by 2030, Yergin has no problem telling us that wind energy is currently more expensive than either gas or coal-based energy, and less reliable to boot -- even though modern turbines produce 100 times more energy than they did in 1980!

Yergin then gets into energy efficiency, praising Dow for cutting its energy use by a quarter from 1995 to 2005 and letting us know that U.S. airlines, as a collective, doubled their efficiency since the 1970s. Alas, while U.S. investments in smart meters and smart grids are a nice step forward (despite their cyber insecurity), Yergin reminds us that China and Japan's efficiency programs are much, much more ambitious than the ones stateside; and unlike America, the Asian powerhouses actually have a knack for hitting their energy reduction quotas, too.

So, where does Yergin see the future of energy taking us, then? One possible scenario he paints is a world where biofuels begin to gradually supplant petroleum -- a leap from "hydrocarbons to carbohydrates," Yergin cutely quips. He envisions the U.S. (which already has 2.35 mbd biofuel/transport fuel blend production quota set by 2022) becoming more invested in ethanol-like fuel sources; indeed, Yergin predicts that half of the U.S. Navy's liquid fuel supply could consist of such by the end of the decade. Interestingly, Yergin reminds us that the war of agri-dollars against petro-dollars actually goes as far back to the Teddy Roosevelt Administration, with prohibition (not to mention that standard gasoline is just a third the cost of "gasahol") helping steer the U.S. towards a petroleum fuel economy as opposed to a ethanol-based one.

Yergin talks briefly about the Energy Policy Act of 2005, which effectively banned the controversial fuel additive MTBE and established a new Renewable Fuel Standard. Even though the U.S. used approximately 41 percent of its 2009 corn supply for ethanol, Yergin tells us that we still lag far behind Brazil, whose auto fleet is already 40 to 60 percent ethanol-based -- a feat which has resulted in Brazil becoming an unexpected net exporter of oil.  By 2011, however, tax credits for U.S. ethanol production expired...and so did tariffs on Brazilian exports.

All sorts of cellulosic ethanol R&D is going on at the moment, Yergin states, with switchgrass and enzymatic conversion representing just two of the many non-conventional experimental fuel projects being funded, in part at least, by the U.S. government. By the way: did you know that algae is responsible for a good 40 percent of the world's oxygen supply?

Yergin winds the book down with a recap of the history of the United States automobile industry -- as well as take time to make fun of the U.K.'s absurd nanny state legislation, including a real knee-slapper called the "Red Flag Act." To summarize here? The Model T kills the electric car because its cheaper and more reliable, Corporate Average Fuel Economy legislation saves the U.S. an estimated 2 mbd in the 1980s, light trucks become all the rage in the late 1990s and in 2007, the Energy Security and Independence Act increases national fuel standards to 35 mpg by 2020. And also, that was the first year the Prius outsold the Explorer stateside; Yergin then tosses out a hilarious quip about Southern doofus exemplar Trent Lott telling Toyota his state legislature "are warriors on your behalf" after they opened a new plant in Mississippi.

Speaking of neo-electric cars -- your Tesla Roadsters and Nissan Leafs and the like -- Yergin said such vehicles could represent as much as a quarter of annual global sales by 2030. And also, the same guy that discovered what "smog" was was also really, really into weed, apparently. Ever the realist, Yergin reminds us that there are still plenty of problems with modern electric cars, namely "thermal runaway" and "range anxiety." Plus, the vehicles may indeed be too quiet, with Yergin stating that some manufacturers are attempting to creates synthetic engine sounds to keep the hard of hearing from being splattered by the Chevy Volts of ten years from now.

Basically, regarding the cars of tomorrow, Yergin is estimating increased efficiency and decreased emissions, with hydrogen and natural gas fuel cells possibly becoming a viable energy source in the not too distant future. By the way, did you know that China became the world's largest auto market in 2009, and are currently refining their own value-priced smart cars? Alike that one dude in "Detropia" forewarned, it may be time for us to start doing our research on companies like BYD, in preparation for when they inevitably take over the planet the same way Toyota and Honda did in the 1980s.

Concluding the tome, Yergin throws out a few more interesting stats (like North Dakota being the second largest oil-producing state in the U.S.) before arriving at his central thesis: that as billions of people across the globe slowly rise out of poverty, meeting the energy needs of a vastly growing consumer class might just be the single most important issue facing the modern world. Even so, Yergin doesn't think the world of two decades from now will be that much different than our world today; even with 2030 global energy consumption expected to increase 30 to 40 percent from today's rates, he still estimates that roughly 80 percent of the worlds energy will be produced by hydrocarbons at that point. With a $130 trillion global economy awaiting us, Yergin said that the future of humanity hinges on a successful transition from oil diversity to energy diversity -- a worldwide challenge, he concludes, that depends greatly on the "globalization of innovation" going on around us right now.

Now that my unofficial Cliff Notes write-up is over, I guess its time to give the book a proper review, no? Well, I am a huge fan of Yergin's work, and although it took me a few years to get around to reading "The Quest," I am glad I did. It's a truly comprehensive book that's informative without being stuffy and thought-provoking without becoming too political. It does an absolutely phenomenal job of condensing an insane amount of information into a digestible -- yet still meaty --  package, and there's hardly any aspect of the energy industry that Yergin doesn't adequately address and explain. More than just an intellectually-stimulating primer on modern energy, it's actually a damn entertaining history book, to boot -- with so much worthwhile information in it, written in prose so confident and straightforward, this one is guaranteed to come up when the debate about "best nonfiction book of the decade" arises in 2019. "The Quest" isn't just required reading for anyone who is interested in energy and future geopolitics; it's a freaking outstanding analysis of how and why the world, as we know it today, is what it is.


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