Steve McDonald: Hi, everybody. I’m Steve McDonald. This is your Market Wake-Up Call. Our guest this week is John Hofmeister, the former president of Shell Oil and our keynote speaker this year at the Investment U Conference, and he’s here to talk about, of all things, oil. Welcome, John. John Hofmeister: Thank you for having me. Steve McDonald: Oh, it’s my pleasure. Let’s start with the resurgence of fracking in the U.S. Is that going to counter the production cuts that the Saudis pushed for in the last OPEC meeting? And how is that going to affect the price of crude going forward? John Hofmeister: A lot of it depends upon the global growth of demand for oil, which I think is now predicted to be somewhere in the range of 1.5 million barrels in 2017. I think that the recovery of shale in the U.S. is going to proceed more slowly than most people think, largely because the funding that the drilling companies need is not going to be easily available unless they have their own capital to spend. In other words, there are three problems with the recovery of the oil shale in the U.S. No. 1, the supply chain is fundamentally broken, and there are already inadequacies in the supply chain to provide, for example, frack sand, other parts and equipment, and pressure trucks. There aren’t enough pressure trucks. So supply chain is one. Two, people. A lot of people disappeared from the industry and they’re not coming back quickly. Third is financing, which I already mentioned. Those are three obstacles to a recovery. So in terms of the OPEC cuts... I do think that the OPEC cuts will make a difference. I think the equilibrium will set in about midyear based upon demand growth from the rest of the world. So I think that the recovery in the shale formation will balance out pretty reasonably with the OPEC cuts and the recovery of shale. So I don’t expect a major price or supply excess as a result of shale recovery. Steve McDonald: Well, with the supply chain problems in mind, President Trump has said the goal for the U.S. is to be energy independent. Is that possible? Do we have the reserves to do that? And what about the geopolitical issues? That’s going to create some real problems with our allies in the Middle East. John Hofmeister: We will not be oil independent in this country I don’t think ever. Could we be energy independent? Well, that’s a separate question. Energy independence, where we draw upon natural gas not only for power generation, electricity purposes, but also as a transportation fuel where we go seriously into the natural gas as a source of transportation fuel, whether it’s LNG (liquefied natural gas), CNG (compressed natural gas), ethanol from natural gas, methanol from natural gas. Now we’re talking about real energy independence predicated on a combination of U.S. oil production and U.S. natural gas production. But otherwise, if you rely on oil, remember, we import 7 million barrels of oil a day every day from production sources around the world, whether it’s Venezuela, Nigeria, Middle East, and we can’t get through the day without imports. So we’re a long way away. At the height of the oil shale production two years ago, we were at about 9.2 million barrels in a country that needs 16 million to 17 million every day. That’s not going to disappear. I don’t think we’re going to be oil independent ever. So we will continue to have a relationship for oil with our friends wherever they exist in the world because we will need it unless we really go full-out for natural gas to substitute for oil. Steve McDonald: Well, one of the things I’m hearing, and this is kind of an add-on question to the last one, is technology. Several people who’ve been on this program have said advancements in drilling and fracking and the technology of drilling and fracking have come so far that those alone could drive the price of oil way down because we’re going to have so much more oil available. Where are you on technology? John Hofmeister: We have a wonderful treasure trove of technology, much of which is being applied, much of which has yet to be applied, because we have some old reservoirs, old wells and we get a lot of our production from previous generations of technology. So as the future unfolds, the introduction of new technology and the productivity associated with that new technology will in fact increase our capacity in the oil reservoirs, but let’s remember: Shale declines rapidly. So if you’re getting roughly an 80% decline rate in the first year of a new well in the shale formation, you have to keep drilling wells to stay even. So that huge decline rate is actually benefited from the technology, but it is not completely offset. So, in other words, there will be a balancing out of whatever technology can provide and deliver in terms of increased production, but it’s going up against the natural resource base, which declines rapidly by the nature of how that oil exists in the earth. So I don’t think that this is going to be a swamp or a wave of oil coming toward us in the future that is suddenly going to overwhelm our ability or our capacity to produce it. I think it’s really going to be a continuous factorylike automation, structural change in the oil reservoirs that will help us, but it’s not going to be as prolific in my opinion as some people are predicting. In addition, for all of the regulatory relief that the Trump administration is offering, something we have to be mindful of: civil protest, civil action to try to slow down fossil fuel production. My expectation is that the Trump administration will get more ambitious and more directed in terms of what it’s trying to do. We’re going to see a major pushback from within society itself that says, “Too much is too much.” There is this incredible opposition that is demographically driven by younger people who think we are past the oil age. The Obama administration did enormous damage to the reputation of the fossil industry, and we’re going to need fossil fuels for the next 40, 50 years - who knows how many decades into the future - and what the Obama administration did and its ilk is they somehow cemented in young people’s minds that there is something god-awful about fossil fuel and that we should move away from it because we can substitute wind and solar for fossil energy. Well, the mindlessness of what Obama did, and he did it deliberately, is inexcusable to the people of America. Particularly people who depend upon affordable and available energy for their lifestyle and for their living means. So we have to overcome this civil protest. It’s going to get harder and harder. We see it playing out in pipeline production today. It’s going to move ever further into society, and I think it’s going to be a big problem for what the energy industry could otherwise do for us down the road. Steve McDonald: Interesting. I could spend another hour talking to you about the damage that Obama did to fossil fuels, believe me. We felt it directly in the coal industry. I’m from a coal mining town. But you were our keynote speaker last year at Investment U and you were so popular and the reviews were so positive that you’re coming back. We’ve never done that before. We’ve never had a repeat keynote speaker. I don’t know if you’re aware of that. John Hofmeister: No, I’m not, but I’m greatly honored. I was truly honored a year ago. Steve McDonald: We are very happy to have you back. Can you give us a little sneak peek of what you’re going to be covering? John Hofmeister: Well, I think I’m going to be as realistic as I can be about the opportunities and the obstacles. I just highlighted one of the obstacles, which is social protest, but I think there is a wonderful opportunity for energy investment. I think the U.S. has everything going for it, including executive leadership that wants to see energy make a material difference in the economic well-being of the future of the country. I think we’ve appointed an energy secretary who understands the economic value creation aspect of all forms of energy - not only fossil, but also alternative energy - in Rick Perry. I think we have huge opportunities in front of us, but we have some obstacles. Not the least of which, and we’ll get past it, but the supply chain obstacle is huge. And investors need to be wary and understanding of this supply chain obstacle. Steve McDonald: John Hofmeister, the former president of Shell Oil, keynote speaker at Investment U. Thank you so much for being with us. It’s always such a pleasure to speak with you. John Hofmeister: My pleasure. Thank you, Steve. Steve McDonald: And that’s it for this week. Thank you so much for being a part of us. For everybody here at the Market Wake-Up Call, I’m Steve McDonald. Make sure you come to the Investment U Conference. It’s one of the best things we do. I’ll see you there. [End of Audio]