As crude oil prices continued to fall to less than $60 per barrel (bbl) in mid-December, John Hofmeister, former president of Shell Oil Co. and founder and CEO of Citizens for Affordable Energy, looked to provide some perspective to attendees during “The New North American Opportunity” panel at Privcap’s recent Energy Game Change conference in Houston.

Hofmeister opened the discussion by telling attendees, “First of all, we have to remind ourselves that global demand is incessantly headed towards 100 million barrels a day of consumption, and if we lose sight of that, all is lost.”

“The inflated, over $100 value per barrel was too much,” he said. “As a consequence, the global economy has really been stymied by energy costs that are just out of the range of everyday people, including Americans.”

According to Hofmeister, declining prices are an opportunity for the market to find a reasonable cost for oil “within a more rational, market-driven manner,” and that cost won’t be at $60 per bbl. The underlying demand is too high, he said, with production only exceeding that demand by about 1 million.

“While we’re going through a correction, it’s a necessary correction,” he said, though “it’s been a bit more volatile than it had to be. But we will find ourselves later next year, probably getting back to some normalcy.”

Time on their side?

In the meantime, though, panel moderator Claire Farley of global investment firm Kohlberg Kravis Roberts & Co. LP wanted to know, how will the operators handle the correction period?

The short answer, according to Hofmeister: time.

With the majors, “time is decades, not just a five-year [plan], not a 10-year [plan], but they are positioning for 2030, 2040, 2050, in what they’re doing today,” he said. Their long-term outlooks provide the stability within the market and the “underlying framework” of the industry, Hofmeister said.

The smaller, independent operators are the most vulnerable within the current market, he warned.

“They tend to be more leveraged, they tend to be more dependent upon their entrepreneurial instincts,” he said, while also emphasizing how necessary they are to the industry’s overall health. “They tend to be very good at what they do, and they have great hound dogs sniffing out opportunities all the time. … They are the marginal producers who really do bring the extra ‘oomph’ to the industry.” However, their focus on “the near-term, opportunistic play, the near-term responsiveness to the market” also means that “if we lose 500 drilling sets next year, which is what some analysts are predicting, they’ll be the first to fall,” Hofmeister said.

What’s next?

For the future of the energy industry in the U.S., Hofmeister looks to natural gas, especially as a way to increase competition at the pump. Through a combination of private equity investment in gas infrastructure and two relevant regulatory changes, he said a viable strategy involves giving U.S. consumers the choice to move away from oil. The necessary regulatory changes include “making methanol a legal fuel and enabling companies to shift today’s automotive products to a flex-fuel software that’s already in the fueling system in the car.”

“Those two regulatory changes, along with private investment money to build the ethanol infrastructure, the methanol infrastructure, more CNG, more LNG and more GTL [gas to liquids]” could displace oil as the primary fuel used by consumers, Hofmeister said. “That would be the path to U.S. energy independence.”

Switching to natural gas is common sense, according to Hofmeister.

“The price leverage on natural gas vs. oil, even at $60” makes gas an attractive option, he said. “Natural gas is such a benefit to the economy and the consumer—and to the environment, let’s remember—that it would be an amazing opportunity to transform America’s mobility system.” Its abundance also draws Hofmeister to gas as an answer to the question of where tomorrow’s energy will come from. “I don’t think—and I’ve said this at multiple forums—I don’t know anyone in the United States of America who has yet been able to get their heads around how much natural gas we actually have.”

What would a switch to natural gas mean for the future of North American oil? Not that demand for it would fall, Hofmeister said.

“I think with respect to global growth in demand, let’s remember 2 billion people on Earth who don’t have access to energy and they want access to energy,” he said. “So at the macro level, I think whatever the U.S. does, global demand for oil will continue to increase or not drop off very much over the next 10, 20, 30 years.”

Global demand growth won’t convince Hofmeister that the time has come for the U.S. to lift restrictions on exports of crude oil, however.

“When it comes to exporting crude oil, I think national security comes first. We live in a very, very scary world, and that’s going to continue to be scary for who knows how long to come,” he said. The best way to deal with the current glut of crude oil around the Gulf of Mexico, he said, is by lifting Jones Act restrictions.

The Jones Act, “which prohibits the ability of a foreign tanker to pick up excess crude at Corpus Christi or Port Arthur or Houston and take it to New Jersey or Delaware, or take it around the Panama Canal to Los Angeles or Seattle,” is “absurd in today’s world,” Hofmeister said. Lifting this restriction on moving U.S. oil to different regions of the U.S. would not be an easy undertaking, he said, “but I’d rather do that, from a national security standpoint, than suddenly export a temporary glut.”