MS. DIANE REHMThanks for joining us. I'm Diane Rehm. The price of oil is hitting lows not seen in more than a decade. Many industry analysts project the global oil (word?) driving these price declines will continue for much of next year. Here to talk about why there's so much cheap oil on the market and what these supplies could mean for consumers and the world's oil producing countries, Kevin Book of Clearview Energy Partners.

MS. DIANE REHMFrom a studio in New York, Michael Levi at the Council On Foreign Relations and Benoit Faucon of The Wall Street Journal. Do join us, 800-433-8850. Send an email to drshow@wamu.org. Follow us on Facebook or send us a tweet. Thank you all for joining us. And it's good to see you all, thank you. Kevin, give us a sense of how much the price of oil has dropped in the last few months and throughout the last year.

MR. KEVIN BOOKWell, yeah. Diane, the price of oil, which isn't something most of us think about, we mostly think about the gasoline that goes into our cars.

REHMSure, right.

BOOKBut at 35, $36 a barrel, oil is now about a third of where it was in its peak a little over a year ago, in the summer of 2014 and it's down from earlier this year, peaks in the 50s and low 60s at times for some of the grades of crude. So what we're talking about is a substantial reduction, but more importantly, the price doesn't tell you everything. A number just sounds like a smaller number or a bigger number. But a lot of the projects that were conceived of and that are operating today were planned at prices in excess of 40 or $50 a barrel.

BOOKSo what we're talking about when we're in the 30s is a number well below the comfort zone for most of the new production that we see online.

REHMSo what would you say are the key factors driving the cost down?

BOOKWell, the first and most obvious one is that there's a lot of supply out there. We've become very good at producing, through your favorite technology, hydraulic fracturing, but in addition, conventional oil producers in OPEC decided not to rationalize their production. They decided they would keep going and try to essentially regain market share they had lost to some of the new production. Finally, not to be overlooked, demand has been weak. A lot of oil consumption is not like what you'd expect in economics textbooks.

BOOKSo in developing economies, a lot of oil consumption is linked to GDP growth. Linked to GDP growth means that the fastest growing parts of the oil market aren't.

REHMAren't.

BOOKNot as fast. Not very fast at all really.

REHMAll right. And to you, Michael Levi, what about global demand and how has that shifted in recent years?

MR. MICHAEL LEVISo Kevin is right on the money when he describes the dynamics. When the price started to fall about a year ago, everyone was focused on supply. But it's that combination of the two that matters and we've seen restrained growth or declines in oil, gasoline, diesel consumption from developed markets and then, in the last year, we've seen big concerns about a weak Chinese economy. China was the big driver of oil demand growth in the 2000s and when people look at it and say, maybe it won't be as big of a driver, they get nervous and bit the price of oil down.

MR. MICHAEL LEVIBut the key is when these two pieces come together. And the strange thing about the oil market is that a very small difference between supply and demand can lead to a very large impact on the price. Right now, we're producing maybe -- the gap between supply and demand is maybe one percent of total global oil consumption. Very small. But we've seen, as Kevin said, a two-thirds drop in the price. So it's extraordinary.

REHMAnd to you, Benoit, in a recent piece for The Wall Street Journal, you wrote that OPEC thinks the price of oil is going to stay low for the long term, but will bounce back from where we are. Now, what's behind the rationale for their thinking?

MR. BENOIT FAUCONWell, look, their thinking is basically not only there's oversupply, but there's -- or actually a lot of oil that is already in storage. So even if they were going to cut their production, there's so much that is already there, you know, waiting to be unleashed to the markets and not only in the U.S. or in European countries, but also now more and more in Asian countries like China, that even if they sort of shut the spigots, the oil is there to be, you know, brought back to markets. And that was the main rationale behind the report they prepared behind, you know, before the meeting where they decided effectively that there was no ceiling. There was no limit anymore.

REHMTell me where all this extra oil is being stored.

FAUCONWell, (unintelligible) there is even -- imagine Iran is coming back, you know, next year -- I mean, there's going to be an increase in -- an expected increase in their exports, but already there is oil, Iranian oil, in storage in Delhi and in China. So even though it's not even, you know, brought back yet to the refineries, but it's basically very close to the refineries physically. So China is one new development. You have a lot of storage of oil there. But, of course, you know, there's been already, since the '70s, in the, you know, the embargo, the oil embargo in the '70s, you know, oil in storage in the U.S. and Europe, you know, the cushion.

FAUCONSo all of this is adding up, meaning that even if OPEC, let's say, you know, really reduced production, the oil is already out there ready to be brought to refineries.

REHMSo Michael Levi, how much is Iran's production going to flood the market, perhaps bring prices down even lower?

LEVIIt's a big of a guessing game, but the consensus estimate among analysts is that Iran will add somewhere between 300 and maybe 400,000 barrels a day of production in the first half of this year. Again, to give you a sense of context, that's about .3 percent of the global oil market so not a huge number and one that, because it's expected, shouldn't have a particularly big impact on the market. If it turns out that Iran can ramp up its exports much faster than people expect, then that would be a surprise and could drive down prices further.

REHMWhat about Saudi Arabia, which is continuing to produce oil at its usual pace?

LEVIThere are no signs from Saudi Arabia that they're going to cut back on production and, in fact, they've almost maximized. But they still keep a little bit in reserve to respond to emergencies and because of technical constraints. But right now, I think that when Saudi policymakers look at the world, they say, we can't turn this around by ourselves. We would just cut back our own production and someone else would take it. So if prices are going to be low, we're might as well at least sell as much as we can and get as much revenue as possible.

LEVIWhat's happening is that it's not just Saudi Arabia thinking that way. It's a host of oil producers thinking that way and the combined impact of all of that is to drive prices down even further.

REHMKevin Book.

BOOKDiane, it's important not to discount the significance of the global stockpiles. The OECD commercial stockpiles now are above 3 billion barrels of oil and refined petroleum products. To give you some context about what that is, that's about two and a half days of consumption more than is typical over the last five years for December. In other words, all of the oil production and refining in the world could take a long weekend and that would be what it takes to bring things back into balance.

BOOKWhen stockpiles are that full, OPEC knows that they don't have a lot of power to influence price. They'd be pushing the string. And Saudi, in particular, being essentially the main player when it comes to the flexible spare capacity that could be brought or taken off, they tend to cut when stockpiles are falling, not when they're building.

REHMKevin Book is with the Clearview Energy Partners. Michael Levi is director of geo economic studies at the Council On Foreign Relations. Benoit Faucon is a reporter for The Wall Street Journal. If you'd like to join us, 800-433-8850. Send us your email to drshow@wamu.org. Kevin, we have a tweet here which says "larger producers just want to put smaller producers out of business by keeping the prices unprofitable." How do you respond?

BOOKThe right metric may not be large and small, but more expensive and cheap. Economies of scale are certainly a big part of making money in the oil industry, but no one's going to beat OPEC. The cost of actually lifting a barrel out of the ground and bringing it to market in Saudi Arabia is a single digit number. No one else can compare in the private corporate world. The high cost producers are in trouble. That doesn't just mean small producers, though. It means some of the biggest producers in Canada and they have very, very high cost resources in the oil sands, which will be very expensive to even operate at the current price and certainly the price deters them from bringing new resources online.

REHMDo you agree, Michael Levi?

LEVII think that's essentially right. The other advantage that the big guys do have over the small guys is that they can be a bit more patient. They have big reserves of cash that let them essentially wait until the price is right in order to drill. For some of these smaller companies, they have to drill just to generate cash in order to pay their creditors back. It's a sort of approach that can lead you into a death spiral if prices don't recover, but it still happens.

REHMMichael Levi, he's with the Center For Geo Economic Studies at the Council On Foreign Relations. We'll take a short break now, and when we come back, we'll talk about the repeal of the ban on the export of U.S. crude. Stay with us.

REHMAnd welcome back. We're talking about the price of oil. And many people want to know its relationship to the price of gasoline. We have an email here from Eugene in Hilton, N.Y. The last time the price of oil was as low as it is now, say, $40 a barrel, what was the average price per gallon at the pump for the U.S. consumer? Do you have any idea, Kevin?

BOOKI don't off the top of my head.

REHMHow about you, Michael Levi?

LEVII don't either, but my guess is that it was somewhere in the neighborhood of $2.00 a gallon.

REHMBenoit, do you want to chime in?

FAUCONWell, what I do know is in European countries, there's no automated adjustment to lower crude prices because a vast majority of the actual price at the pump is actually taxes. So consumers don't immediately will not fully take advantage of lower crude prices.

BOOKJust to add to Benoit's comment there. If you take a barrel of oil, it's got 42 gallons in it, so if you divide by 42, you're half -- more than half way there in many cases. On top of that, you have taxes -- federal taxes of 18.4 cents per gallon, state taxes probably 30 to 40 cents on top of that. Additives and transportation, all in, you could be looking at 60 or 70 cents on top of that. So if you're at a barrel price of 42, you should start with a dollar and then you could work up with about 90 cents from there. We're below that now and the rest is -- well, it's marketing.

REHMMichael Levi, do you see this as a time to raise taxes on gasoline?

LEVII think it would be wise to increase the gasoline tax in order to be able to pay for transportation funding. I think, ideally, we would use a gasoline tax to also incentivize efficiency and conservation. That would improve our national security, strengthen our economy and be good for climate change. I think, in reality, that's not politically plausible and so we're pursuing it through other means. And, right now, with prices low, the priority has to be to make sure we don't back off on things like fuel economy rules that have improved efficiency in our fleet but that might not look so attractive when oil is cheap, because we'll need them later on when the price rebounds.

REHMHmm. All right. And how soon do you expect that to happen, Michael Levi?

LEVII wouldn't be an honest analyst if I pretended to know when prices will rebound. But I'll say that it would not shock me to see, within five years, that prices were back up closer to $100 than to where they are now.

REHMWhat do you think, Kevin?

BOOKWell, I applaud Michael's caution. Oil analysis is a very democratic enterprise, Diane. Anyone with access to a spreadsheet data and a willingness to ignore a lot of what they learned about statistics can do it. And they can be wrong too. And the further you go into the future, the more likely you are to be wrong. But the historical price of oil, from the start of oil, is about where we are now in real-dollar terms. Which is to say that, if you think about the general higher cost of production that we've seen, because it's harder to get some of the oil out of the ground that we now need, you would expect it to go up from here. In terms of actual balances, we don't expect to see inventories beginning to decline, necessarily, until the second half of next year.

REHMHmm.

BOOKWhich means that demand would have to do heroic things before prices would begin to rebound significantly.

REHMAnd, Benoit, as a reporter whose been watching all this, what are your expectations?

FAUCONWell just to agree with other participants, I mean, next year it's the expected return of, I mean, larger quantities of Iranian oil into the market. When they speak to refiners already, they're being asked heavy discounts. So, I mean, that's one component in the global formation of the price. But, clearly, if you're talking about problems with surplus right now, you're going to have even more excess next year. This said, of course, is going to be a medium-term impact on the U.S. and Canadian production, so that some of this overproduction is going to be coming out. But that takes time to bite. So I would say downward pressure, I mean continued downward pressure next year until maybe some, you know, increase in the following five years.

REHMAll right. Let's move on here. Kevin, last week the president signed in to law the measure passed by Congress to repeal a ban on U.S. crude exports first. Why was this ban put into place in the first place? Back in the '70s, what were the reasons?

BOOKWell, the ban was actually a vestige of Nixon and Ford-era scarcity policies, price controls. And it had really no bearing on the way the market was working in many of the decades since then. It had been progressively weakened in small measure. First, for exports from Alaska, some from California. But it had been largely in place, even as the U.S. was producing a crude that was essentially comparable to other crude in the world but discounted because it couldn't reach the world market. So there was a lot of pressure from producers here in the U.S. who wanted to try to close that gap between the West Texas intermediate price -- the price benchmark for U.S. crude and the Brent crude price, the global benchmark.

REHMSo how soon would you expect U.S. crude oil to hit the export market?

BOOKWell, there's actually -- the great thing about crude oil is that, unlike LNG, liquefied natural gas, you don't have to spend tens of billions of dollars. There's ports, there's boats, it's ready to go. It's about as shovel ready as anything gets. Here's the downside: remember that part about the world being full of oil? For U.S. crude to reach the world market, it has to be competing with the rest of the light sweet crude production in the world right now. There isn't a lot of room for incremental light sweet. So even if it could go out, we probably wouldn't expect to see more than 100,000 or even 200,000 barrels per day over the course of next year, incremental to now.

REHMSo why did Congress do this now?

BOOKWell, Congress is wonderfully reactive when it comes to energy policy. On the other hand, this is probably good policy for the long haul. This won't stop job losses in North Dakota tomorrow. No way. That's a global economic phenomenon because of supply and demand. But in the future, this will be, in all likelihood, a strong incentive for domestic producers to continue. And with that comes broader economic upside.

REHMMichael Levi, your thoughts.

LEVII think Kevin is right but there is a second reason why this happened now. Congress has wanted to lift the ban or at least Congressional Republicans have wanted to for a while. They haven't been able to. There's been opposition from Congressional Democrats and from the White House. The reason they were able to do this now is because they did a trade. In exchange for lifting the ban on crude exports, there was a big extension of the tax credits that support solar and wind energy. There was an authorization for the president to contribute money to international efforts to help countries deal with climate change and reduce their emissions. And those were big things that the White House and Congressional Democrats had sought.

LEVIYou know, this is really the first big bipartisan trade on energy that we've seen in at least eight years, which strikes me as interesting and maybe an opportunity to look for more opportunities in the future where there can be win-wins.

REHMYou know, I find myself wondering -- we've been talking about the U.S. an awful lot -- what about countries like Venezuela that need the price of oil to stay at a certain benchmark in order to support their own economy? Benoit.

FAUCONWell, Venezuela is, you know, I think you named the worst-case scenario here. I mean this is the one that has spent the most during the oil boom for social welfare. And as a result, it's obviously the most fragile, you know, socially and potentially politically now that the good times are over. However, the good news has been that there has been free elections, which put, you know, the opposition into control of parliament. It is the next set, you know, to achieve, which is the presidency of Maduro doesn't, you know, stop and put stumbling blocks on that alternative, then you potentially have a way for Venezuela to solve its economic problems, you know, in a peaceful and democratic manner.

FAUCONBut there are other countries at deep risk because of that oil crash. And some of them are in Africa, particularly Angola and Algeria, which have also spent a lot on their population when they could afford it but have maybe less democratic potential to resolve these issues. Because they have -- they all have a sort of an authoritarian dimension. So all these countries are at risk of unrest.

REHMAnd, Michael Levi, what about Russia?

LEVIRussia has been remarkably resilient, at least politically, through the oil price collapse. They've been facing financial sanctions, energy sanctions and then, on top of that, the big fall in oil prices. It's led to a contraction in the Russian economy but not a big dent in support for Vladimir Putin and not particularly large budget challenges, in part, because the ruble has collapsed alongside the price of oil. And so the ruble-denominated revenues that the Russian government receives haven't fallen by nearly as much as one might imagine.

LEVINow, it could be that, as the next year unfolds, the Russian economy is hit more and people become more upset. But, for now, you're not seeing a reversal in Russia's policies in Ukraine. You're not seeing a fundamental political change there. They're weathering the storm surprisingly well.

REHMBenoit, do you want to add to that?

FAUCONWell, one thing that happened with which I was -- which I thought was interesting is this was a country that was very well equipped with -- by, I think, sanctions. I mean, a lot of the companies -- Russian companies already had assets, accounts and subsidiaries offshore. And as a result, it's been much more resilient in, you know, comparable sanctions which may have been to tied to anyway in -- on Iran. So, yeah, that's one of the surprises, (word?) with our prices and sanctions, is actually not collapsing at all.

REHMAll right. Here's an email from Raymond. How long can exporting countries hold on with low prices due to impact to their GDP? It impacts their economies more than it does ours. As a matter of fact, low prices should positively impact the U.S. economy. Michael Levi.

LEVISo Raymond is right that lower prices should help the U.S. economy. They help it less than they used to because we now have a large oil-producing sector that gets hurt, even as consumers gain. For individual oil-exporting countries, the length of time they can hang on depends on at least two big things. The first is how much money do they have in the bank? If I'm Saudi Arabia, I have a lot of money in the bank. I can run deficits for a long time. Saudi Arabia ran deficits more often than it didn't for the 20 years after the mid-1980's oil-price collapse.

LEVIAnd then the other big question is, how smoothly can I adjust? And, again, to take the Saudi example, Saudi Arabia has a very large budget that requires large oil revenues. But they've been able to do things like build subways more slowly in order to drive down their annual budget and cope with the lower price.

REHMKevin Book.

BOOKWell, one of the things about the U.S. side of the story, too, is that we have an economy that has recovered and diversified. So if you go back two or three years, the importance of oil production to our economy was considerable. Had this price trough hit us then, it would have impacted our economy in a probably much more devastating way.

REHMHmm.

BOOKThe consumer benefit is probably overstated too. A lot of the people who experienced the greatest per-capita gain, in terms of their income and how they can spend it, are those who are largely driving long distances on relatively low disposable incomes. They're not the big consumers on the coasts. They're mostly the folks on middle incomes in the middle of the country. And so what you have, in a country like ours where we're producing so much more oil, is actually perhaps more exposure to the downside than we were willing to admit.

REHMInteresting. Here's a tweet from John, who says, by allowing America the ability to export oil again, is the government trying to raise the price of gasoline? Benoit.

FAUCONWell, I don't think that's the intent. It's more sort of a moment of comfort, finally, where the U.S. feel confident it can be reliant on its own supply and therefore can have some leeway, you know, to export some of the oil it produces at home. That's kind of the situation that I, you know, hasn't been reached, you know, to that extent for decades.

REHMRight.

FAUCONSo I think it's more timing of, you know, regardless of the price, I think, is really a moment where the U.S., as a country, feels that it can bring some of its oil outside because its ability to produce at home is so strong.

REHMAll right. And you're listening to "The Diane Rehm Show." It's time to open the phones. Let's go first to Sycamore, Ill. Hamish, you're on the air.

HAMISHYes. Good morning and thank you for taking my call.

REHMCertainly.

HAMISHI have a problem understanding how they raise and lower the prices. The oil companies seem to raise the price the same amount at the same time and they all lower the price by the same amount at the same time. And it just seems like they lower it in the area A and they raise it in area B, and then they reverse it. And it just -- it looks like price control.

REHMWhat do you think, Michael Levi?

LEVIWell, you do see prices moving similarly pretty much everywhere in the world and that's because the oil market is a remarkably competitive market in the short run. If I try -- if I was an oil company and I tried to price my oil a dollar more expensive than everyone else, no one would buy it. They'd go to the others. And so I price my oil the same as everyone else does. So it's actually a remarkably competitive market. Now, when it comes to gasoline, there are more regional variations, mostly due to taxes and to environmental rules that vary from state to state and country to country. But you can also run into bottlenecks and problems with refineries, pipelines, that do drive regional variations.

REHMAll right. To Jim in Carrollton, Texas. You're on the air.

JIMGood morning.

REHMHi.

JIMI just wanted to say that, if they can ramp up production like this, it's pretty obvious that we have been lied to, that there was never an oil shortage, there was never a gas crisis. We've been manipulated so that they can keep the price high.

REHMKevin Book.

BOOKIf only they could coordinate so well, I'm sure the companies would be delighted to be able to do it. But unfortunately, antitrust rules and market realities and the geological facts have gotten in the way. What you had was essentially a price spike that led to innovation. That innovation created a whole new wave of production. It isn't the same thing as peak oil -- that is, in fact, a myth -- the geological point where we've used up more than half of our oil in the Earth's crust is a long way away. But the ability to pull it out and to do so economically is a function of technology and of the prevailing price. And so you needed both for the current surplus to show back up.

REHMMichael Levi, would you agree?

LEVIWe've seen extraordinary innovation that has allowed production of resources that, you know, made no sense 10 years ago, at a price of $30 to $40 now. And that kind of innovation that's been driven by the high price has not only been in production, it's also been on the efficiency side of the equation. And that's now squeezing the market from both sides, leading to these lower prices. And I don't think we've seen the end of the innovation unleashed by that decade of high oil prices yet.

REHMAll right. We'll take a short break here. When we come back, we're going to open the phones, take your calls, comments, questions. We'll also talk about how this oil glut is affecting the refinery industry. Stay with us.

REHMAnd welcome back. Time to go right to the phones, to Battle Creek, Michigan. Hi there, Tim, go right ahead.

TIMHi Diane, you're a national treasure. Thank you for taking my call.

REHMThank you.

TIMI wanted to ask your panel about the climate change implications of the lower oil prices, where we will -- where we see an increase in usage and potentially a decrease in looking at renewable alternatives, whereas we also have a potential for decrease production in the tar sands, which would kind of counteract that. And so I was wondering what their thoughts were on the net effect of the lower oil prices on (unintelligible) .

BOOKWell, Tim, it's a great question. On a net basis, you're going to have probably less incremental oil sands production, but the production that's already being -- that's already coming out of the ground in the Western Canada Sedimentary Basic isn't necessarily going to stop. So low prices are probably going to be more negative than they are positive from a climate basis because they're likely to induce demand not just here in the U.S., where you see folks on the road but eventually in the developing economies. Demand's asleep, but it's not dead. You're going to start to see new expectations built on industrial and consuming sectors based on the expectation for further low prices, and that should, on balance, probably put more hydrocarbons into the consumption system.

REHMInteresting.

BOOKAnd more carbon dioxide into the atmosphere.

REHMWhat do you think, Michael Levi? What about efforts to address climate change?

LEVISo lower oil prices unquestionably are bad for climate change. You get more greenhouse gas emissions when it's cheaper to consume oil, and along with the lower oil price, you've also dragged down prices for other hydrocarbons, but...

REHMBut here we just had this extraordinary climate change summit in Paris with promises, with pledges, and now you're saying that lower prices are really going to stall this.

LEVII'm not saying they're going to stall it. I'm saying they provide a small headwind. But you've identified the critical thing, and that's policy. If we do nothing, it doesn't matter whether oil prices are low or high. We're still not going to meet the goals we need to on climate change. But with lower oil prices, we can still push forward on strong policies that drive emissions down, that increase innovation and clean energy.

LEVIAnd we've actually seen some of these in the developing world. We've seen subsidies for oil consumption that have been in place for a long time that drove up emissions be removed because the politics have changed in the face of low oil prices, so India, Indonesia, Mexico. We've seen real improvements in some places. So it's all about the policy.

REHMSo we have an email from Brian who says, is Saudi Arabia pumping more oil because they see long-term reduction in oil demand due to the climate change treaty? The treaty should lead to reduction in fossil fuel demand, causing long-term price increase, I think she means. This would mean they'd never get a higher price than today, Benoit?

FAUCONWell, there's a paradox in Saudi Arabia, which is it's also one of the world's largest oil consumers. I mean, of course not just because of the car use but most importantly for air conditioning, especially in the winter, which relies largely on burning oil, I mean, Saudi Arabia's own oil. And actually there's always a peak in production in summer as a result of Saudi Arabia using its own oil to carry air conditioning.

FAUCONNow that means potentially lower oil prices and, you know, the push for mitigation measures against climate change means lower consumptions in Saudi Arabia and lower production potentially. And they are already on that step because they already sort of implemented measures for having cars that are more fuel-efficient, for having air condition that consume less electricity and therefore more fuel, less fuel sorry.

FAUCONSo you've having -- you're seeing a push in Saudi Arabia itself to consume less oil, and that could be reflected potentially in the long-term production.

REHMKevin, what about the other parts of the oil industry, for example the refining business? How is that affected by lower oil prices?

BOOKWell, the refining business is typically one where very, very thin margins can make the difference between a very good year and a very bad year. In recent years, it has been great, particularly here in the U.S. They've had a couple of advantages. One of them was low crude oil prices relative to the global price. The second was low natural gas prices that they could use for process energy and for inputs relative to global natural gas prices.

BOOKBut in general, when you have boom times because the price is low, and you're in the business of turning oil into gasoline, business is good.

REHMSo do you see business continuing to be good, Michael Levi?

LEVIBusiness has never been good for long, sustained periods for refiners. They thrive on the short periods where they can make a lot of money and then muddle through others where they're basically breaking even or losing a little. So the reality is that if refiners are minting money for a very long stretch, people build more refineries, and lo and behold, there's more competition, and they are no longer doing so well.

REHMAll right, to Pittsburgh, Pennsylvania. Hi there, Aaron.

AARONHi Diane. My question is, how badly are the American shale oil companies leveraged, and what's it going to do to the American economy if and when they collapse?

REHMBenoit?

FAUCONWell, that's the thing. It seems a lot of them, the smaller producers have been really leaving off paying their interest, which means also they can call for some time. We haven't seen any -- we have seen the beginning of consolidations between oil services, but we haven't seen a major bankruptcy. So that's the paradox of that industry, that even though it's been beneath, you know, the level of price where it could be, you know, balance its account, it can actually for some time, as long as the banks agree to that.

REHMWhat about the question of ISIL or DAESH and how their own consumption of or sale of oil is affecting their ability to carry on their acts of terror, Kevin?

BOOKThey have oil production from essentially static investments. It's not as though they can bring in international services companies to expand their production. And they refine it through extremely inefficient refining means. A lot of the oil is sold at deep discounts on the black market, much of it finding its way into equally inefficient refining further downstream.

REHMWho are they selling to?

BOOKWell, middlemen, thousands of middlemen, many who operate refineries that are similar in form and function to hillbilly stills, seriously. They're just essentially back-of-truck-type operations. They're consolidated in some cases into broader oil flows that go into partner countries like Turkey. In other cases, it's hard to discern whether a hydrocarbon that originated in one place is comingled with another unless you have extremely expensive equipment.

BOOKSo sometimes it finds its way into the mainstream of oil production.

REHMSo are they still, Michael Levi, making the money to keep them in operation from oil or turning to other revenues?

LEVITheir funding is fairly opaque, but the broad sense is that they're increasingly relying on tax revenues rather than just on oil sales. They had, unfortunately for us, relatively good timing. They could depend on oil sales when the price was high, take time to consolidate essentially a somewhat functioning state and now are able to extract money from people the way a typical state does.

REHMAnd let's see, let's go to Richard in Highland, Illinois. You're on the air.

RICHARDThank you, Diane, for taking my call.

REHMSure.

RICHARDAs a casual observer, I've noticed that the -- within the last two years the price of a barrel was around $40, and in my area, it was in the price range of $1.70 for a gallon. And now it's at below $40, and it's $2.00. Excuse me, one other question, why is diesel more expensive when it costs -- it takes less to refine?

REHMKevin?

BOOKWell, there were significant refinery outages in the Midwest, which actually put stress on global -- on local supplies, rather, which inflated the cost of gasoline locally, and in the end, there are distinct differences between summer and winter gasoline blends in some regions. As Michael mentioned, environmental rules require more expensive production usually in the summer months.

BOOKAs a result, you can see those sorts of disparities regionally. In terms of diesel, it's a question of supply and demand. In the end, what we have is a pretty powerful export market for diesel, which is pretty well -- pretty well serviced already, and if you have incremental logistics in freight demand here in the U.S., that'll drive the price up incrementally.

REHMMichael?

LEVISo you have on top of all that this surge in U.S. production of what we call light, tight oil that when you refine it produces a considerably larger fraction of gasoline than the oil that we've been used to running in recent years. So it's all of these pieces come together.

REHMSo overall, Benoit, how would you say the lower price of oil is affecting the U.S. economy?

FAUCONWell, the U.S. economy, well, there's a paradox here. If you think about just the industry itself, I mean, from (unintelligible) generally single-digit amount in the actual, you know, economy, in the actual gross domestic product. So depending on the years, you know, two, I mean, two, four percent. Now the paradox of it is that it's as big pretty much as the creative industries, namely Hollywood. So we're talking about, I would say, the non-oil-curve economy.

FAUCONYou know, many economies, you know, became very reliant on crude oil. That's not the case with the U.S., even though it was, you know, a significant producer, obviously, one century again. And even though it's still a very big producer, the economy relies much less, you know, than other oil-producing countries on, you know, oil, gas and other minerals. And increasingly creative industry, cultural industries are, you know, have the same weight in the economy.

FAUCONSo in a way, if you wanted an example of a country that has grown out of its original, you know, riches into something sort of diversified, the United States is probably the best example.

REHMAll right, and let's now go to Jim in Hagerstown, Maryland. You're on the air.

JIMGood afternoon, Diane.

REHMHi.

JIMI'm curious, too, if your panel has an idea how much electric...

REHMOh dear, I'm afraid we lost him. I think he was getting, Michael, to the impact hybrid and electric cars on the market.

LEVISo hybrid vehicles have already had a substantial impact on the market. We've seen the Prius is now about 15 years old. Electric vehicles are still emerging. If you go about in some parts of the West Coast, you'll see a lot of Teslas on the road. You're still not seeing a huge number of electric vehicles here. The thing to keep in mind is even once electric vehicles become commercial in large quantities, they're going to take a long time to penetrate the system.

LEVISo let's imagine that electric vehicles start being sold in very large quantities around 2025. It takes about 15 years for the vehicle fleet to turn over, and so that would take you to 2040 before you'd have them thoroughly penetrate. I think we're going to see a lot of efficiency improvements from just incremental gains on traditional cars, lighter materials, better engines. There are all sorts of ways to improve efficiency.

REHMAnd you're listening to the Diane Rehm Show. Kevin, do you want to add to that?

BOOKWell, one of the policies, back to Michael's point about policy being a big driver, is the fuel economy standards put in place by the Obama administration. They envisaged a fleet of fuel sippers being sold by manufacturers here in the U.S. and eagerly taken up by drivers because they, of course, came out of a high-price period. Now you have 58 percent of passenger cars actually are light trucks, SUVs and the like. And so you have manufacturers that are going to be facing some financial stress as they try to innovate to deliver on those fuel economy standards.

BOOKIf the policy remains in place, I absolutely agree with Michael, you're going to see innovation that in the end conventional vehicles with new materials and new technologies will probably still deliver most of the fuel economy gains.

REHMSo we have a final call from Jeremy here in Washington. D.C. You're on the air.

JEREMYHey, thanks for taking my call. I appreciate it. A lot of the questions kind of been answered, but I guess -- at first I was worried that, you know, allowing exports from the U.S. would lead to higher prices, but as I think about it, I guess it really shouldn't do much in that front. But one front that I'm wondering about is if it actually will help with our trade imbalance because so much of the trade imbalance was due to, I guess, money leaving the country for oil. Is there any comment on that?

REHMMichael?

LEVISo first, there's something wacky about the oil world. Allowing exports should either have no impact on gasoline prices or actually lower them a little. If -- they way that most models look out at the future, they say removing the ban will increase production a bit. That drives down world oil prices a little and leads to lower gasoline prices. On the trade balance question, I think that this is a very, very, very small piece.

LEVIWhat matters most is that for every dollar Americans make, they spent about $1.02, and as long as we do that, we're going to have a substantial trade imbalance.

REHMInteresting, and finally an email from Bob. Where does the panel see this going in 2016? Has the price of oil bottomed out, or does it continue to hover at current levels?

BOOKDiane, let me offer three milestones. The first is the end of the Iran sanctions, which brings, as has been suggested, somewhere close to half-a-million barrels per day of incremental production, probably in the first or early second quarter. That leans on the oil market. Second milestone, I would suggest that if you think about the small independent producers in the U.S. facing refinancing pressure, April is the window when they're likely to feel the squeeze.

BOOKIf you start to see a supply response in the U.S., you might start to see it in April. And finally, I would point to the end of the year. Going into December, the question will be, is OPEC yet going to step back up, or for that matter is demand going to rise and obviate the move for OPEC? I don't think you're going to see a significant demand response and a thinning of inventories before the third or fourth quarter, but you could start to see a change in direction by then.

REHMSo translating all that into has the price of oil bottomed out?

BOOKI think we've got -- finding a bottom is a very precarious thing. I'd look for an L for the first half of next year.

REHMAnd what about your, Michael, very quickly?

LEVII would be surprised to see the price stay stable. The market is highly volatile for basic structural reasons, and we should expect it to remain volatile over the coming year.

REHMAnd Benoit, to you.

FAUCONYeah, I could see some pressure, you know, to at least remain low. For instance, there's a wildcard that, you know, has not been explored, which is, you know, the return of Libyan light oil on the market.

REHMAh, all right.

FAUCONAs much as people wouldn't care if there was half a million, you know, 400,000 (unintelligible) out of the market, if it comes back...

REHMAll right, I have to leave it there, I'm afraid. I'm so sorry to cut you off. We're out of time. Kevin Book, Michael Levi, Benoit Faucon, thank you all so much, and thanks for listening, all. I'm Diane Rehm.