1. Five years ago, claims that energy crises
had become a thing of the past were not uncommon in policy circles. Such arguments asserted that the developing
world had entered into a post-industrial phase of development in which brainpower,
not oil power, would drive economic growth.
The information age and the rise of ever-mounting efficiencies in energy
use were together weaning the world’s most important economies from their once
unquenchable thirst for energy and were thereby de-linking the correlation
between economic growth and energy use.
In fact, OECD member country oil imports per unit of GDP have been cut
in half since the 1970s; meanwhile, the capacity of oil producers to set prices
greatly eroded. Political and
structural economic differences within OPEC had made it very difficult for its
members to come to an agreement about output levels and this reduced the
cartel's capacity to set prices. OPEC’s
share of overall oil production has fallen from 55% in 1973 to roughly 42% today. Moreover, other fuels, including natural gas
and nuclear power, play a larger role than in the early 1970s. Finally, even if one accepted that energy
was still a key factor in Western economic welfare, large energy producers
developed such a high stake in Western economic growth that they were
increasingly compelled to consider the potential economically adverse impact of
higher energy prices; this too, it was alleged, would invariably moderate any
effort to drive prices upward. (The
great exceptions to this logic were the pariah states that had a strong
ideological interest in fomenting Western economic crises.)
2. Move
forward to mid-2000, and some of these conclusions began to seem rather
strange, even if based on a number of correct assumptions. The new economy, supposedly immune to oil
price changes, began to falter as oil prices tripled over the course of last
year, while natural gas increased four-fold, leading to ever larger
transportation, heating, electric and manufacturing costs in the United States,
Canada and Europe. Energy price rises
have consequently exerted inflationary pressures while pushing down consumer
and investor confidence, all of which are key factors in equity market
movements. Rising price indices, in
which energy plays an important part, have made the European Central Bank very
reluctant to lower interest rates, even in the face of the recent American slow
down and four successive Federal Reserve rate cuts. Because oil prices are dollar denominated, the price hike increased
the demand for dollars and thus further stoked the dollar’s already significant
rise against the Euro. The dollar only
began to slide off its peak vis-à-vis the Euro when oil prices fell this
winter, but that decline can also be attributed to the slowdown of the US
economy. The impact on emerging
economies has been even more serious, as their terms of trade are more readily
affected by energy price increases.
Transition economies in Central and Eastern Europe have suffered more
from the impact of energy price hikes and complicated efforts across the region
to contain both inflation and trade balances.
Finally, OECD growth proved so strong in recent years that the impact of
efficiency gains lessened, as expressed in energy use per unit of output - in
other words, the growth effect on demand for oil and gas has largely
compensated for efficiency gains. At the same time, developing world demand for
fossil fuels has soared as well, and these economies are far less fuel
efficient; thus global demand for oil and gas continues to rise and to put
mounting pressure on supply.
3. Last year's energy price hikes have thus
had an important effect on Western economies, although it is somewhat difficult
to gauge this with full precision. In
many respects, the greatest impact may well have been on consumer and investor
confidence which had been high until energy prices began to creep up last year
- a development that revived memories of the devastating 1973 and 1979
recessions and compelled investors to reflect seriously on other potential
problems like the asset bubble in high technology equities markets which have,
in fact, subsequently crashed. At the
same time, the United States has faced power shortages in certain regions, as
its energy sectors were slow to respond to demand swings. In January, natural gas stockpiles were at
historic lows and wholesale gas prices soared.
4. The fall-out from last year’s oil price
hikes has been apparent in the political realm as well. Long lines at gas stations materialised in
the midst of several price spikes. This
too conjured up images of the disastrous oil shocks of the 1970’s that had sent
Western economies into a tailspin.
Growing strategic and political uncertainty in the Middle East, and
specifically the crises in Arab-Israeli relations, reinforced those fears. Moreover, strikes and demonstrations
protesting against high energy costs and taxes among workers in
energy-dependent sectors in the United Kingdom, France, Germany, the
Netherlands, Poland and Belgium virtually shut down certain European regions
last fall. These strikes exerted
tremendous pressure on European leaders to reduce those taxes which, as it
turns out, are not only structured to discourage wasteful energy use, but also
constitute vital financial lifelines for European states. The financial needs of European public
sectors, coupled with strong environmentalist pressures, minimized reductions
in energy taxes, although key energy consumers were frequently granted special
subsidies to quell the paralysing strikes.
5. Consumer outrage was also apparent in the
United States, where low energy taxes have long encouraged relatively high
levels of consumption - something which is most apparent to visiting Europeans
in the size of cars on the road. In the
United States, gasoline and heating oil prices rose precipitously, while
natural gas stockpiles shrunk to historic lows during one of the coldest
winters on record. Across the American
Midwest, farmers switched from planting corn to beans because the latter
require less petroleum-based fertilizer.
The US chemical industry also suffered from the rising cost of natural
gas-based production inputs. In
response to mounting consumer outrage, the Clinton administration twice dipped
into its strategic oil stockpile to push down prices and to quell consumer
anger - neither of which ranked among the original goals for the
stockpile.
6. More recently, a burgeoning energy crisis
in the state of California has revealed how increases in the price of
electricity, in the context of poorly planned deregulation, can radically alter
supply and demand conditions while upsetting the best-laid plans of industry
and government. That supply crisis
continues to damage the surrounding economy, and California, along with other western
states, now faces a summer of potentially crippling electricity shortages. More worrying still is that spare capacity
in the US electrical industry has fallen to an average of 15%, or roughly half
of the level of reserves in the 1980's.
Concern about electricity shortages, coupled with rising gasoline
prices, unquestionably had a major impact in the Bush Administration's
proposals to open protected Alaskan wilderness areas to oil exploration. They also played a role in in the
administration's announcement that it considers the Kyoto Protocol on global
warming to be a dead letter, a decision that generated great anger in Europe
both for its substance and the manner in which it was delivered.
7. Given this panoply of developments on the
energy scene and despite the recent decline from last summer’s energy price
peaks, it is essential to reassess some of the reigning assumptions about the
role of energy in the economic life of Western countries and the importance it
ought to be accorded in forming national strategic priorities. Clearly, complacency about the availability
of cheap oil is no longer - nor was it ever - justified. Hard questions thus need to be asked about
future supply, the likely movement of energy prices, and the kinds of policies
that will minimize the impact of potential supply short falls, advance shared
environmental goals, and work to build some degree of common purpose between
North America and Europe.
8. Last year’s energy price
hikes were hardly unique, although they were unexpected. Over the last quarter of a century, there
have been three other notable energy price spikes - each of which bore serious
economic and strategic consequences: the October 1973 price hike triggered by
the Arab-Israeli war and the embargo that followed; the price rise that came on
the heels of the Iranian revolution and which worsened during the Iraq-Iran
war; and finally the shock that occurred after the Iraqi invasion of Kuwait.
9. The sources of last year’s price movement
from roughly $10 per barrel of crude oil to $37 are somewhat more difficult to
trace. Indeed, to explain the steady
price rises of last year, one must first look at the sources of the very low
prices that dipped to $10 per barrel, that while greatly beneficial to rapidly
expanding Western economies as well as oil importing developing countries, were
hardly welcomed among oil-producing states.
Indeed, oil prices had begun to fall after a 1997 OPEC decision to
increase production in order to meet rising global demand. OPEC took that decision just as the Asian
financial crisis began to unfold. That
crisis, in turn, caused previously buoyant Asian energy demand suddenly to tail
off. There were important knock-on
effects elsewhere which slowed global demand substantially just as oil
production was rising. As a result, oil prices fell - a turn of events that
further accelerated when, with UN approval, Iraqi oil re-entered the market at
volumes approaching 900,000 barrels per day.
10. OPEC, however, responded to the price fall
in a remarkably unified fashion by cutting supply - an action also taken by key
non-OPEC suppliers like Mexico and Norway.
With global demand soon back on track owing to the resurrection of Asian
economic growth, and with the world’s largest energy consumer, the United
States - which accounts for roughly one out of every four barrels of oil
consumed globally - experiencing tremendous economic growth, oil price rises
well exceeded OPEC’s expectations.
Moreover, low inventories and “just in time” oil industry management
techniques made it difficult to meet this sudden rise in demand. Low stockpiles and the lack of refinery
capacity exacerbated the problem even further.
Thus, last year, supplies fell relative to burgeoning demand, and the
price of oil consequently soared to the very high level of $37 a barrel. Analysts, however, immediately suggested
that the market had overshot, and in this they were correct.
11. In recent months, the fall of energy
demand, coinciding with a general economic slow-down, has brought prices back
down below $27 per barrel. But that
price fall prompted OPEC to enact yet another supply cut, despite warnings from
US and European officials that price rises could make global economic recovery
even more difficult. OPEC officials
responded sharply that if consumer energy prices were posing economic problems,
Western governments would be well-advised to cut energy taxes which, they
argued, add far more to the price at the pump than any increase induced by OPEC
supply restrictions. OPEC does not
consider oil prices ranging between $25 and $30 a barrel to be excessive - a
point of view that Western governments do not share.
12. Over the past year, the Clinton
administration, as well as the French President in Office of the Ecofin
Council, Laurent Fabius, made several pleas to key oil-producing states to
bolster output and contain price increases, yet they were only partially
successful in convincing OPEC leaders of the need to consider their own
interest in Western economic growth.
Although oil producers have obviously derived great benefits from the
price explosion, Western pressure finally led OPEC to increase production by
800,000 barrels a day late last year.
That oil is only now coming on line at a moment when global economies
are slowing and consumption is falling.
For this reason, in January, OPEC ministers, seeking to stabilize prices
in the range of $22 to $28 per barrel, called for cuts of 1.5 million barrels
of oil a day - or roughly 5% of its production. OPEC has concluded that oil prices in this range will not drive a
dagger into Western economies which have, nonetheless, slumped further since
January. This pattern of increases and
cuts reflects the long “lead and lag times” that characterize oil markets, as
well as the great difficulties involved in calibrating market supplies and
demand.
13. OPEC must walk a fine line between
maximizing short-term profits and consideration of the longer-term economic
health of its key clients. In this
sense, it is somewhat misleading to maintain that OPEC economic interests are
diametrically opposed to those of the large energy importers. This is true not only because of OPEC's
direct self-interest in healthy economic growth in the OECD, but also because
many OPEC countries, including even Libya, Iraq and Iran, need Western
investment and expertise to develop more fully their production capacity. In the case of these three countries,
obviously the political and security calculations of Western governments do not
easily coincide with economic interests.
For this reason, the Bush Administration, led by Vice-President Dick
Cheney, is undertaking a thorough re-examination of these sanctions, and has even
broached the possibility of lifting some these partly because of long-term
global energy requirements.
14. Last year’s price shock has had a
compelling impact on policy-makers in Washington who, until recently, had been
somewhat complacent about energy prices.
The price shock, however, has galvanized US leaders to place energy
squarely in the centre of national strategic calculations. One of the critical reasons for this is the
burgeoning energy crisis in California, which stands as a visible warning of
the kinds of difficulties economies will confront if they do not devise viable
long-term strategies for meeting energy needs.
15. The recent price increase exposed serious
flaws in the 1996 deregulation of California’s electricity sector. Deregulation involved a unique set of
compromises between free marketers and interventionists that has yielded the
worst of both worlds. The law has required
utilities to pay market prices for oil and gas, while capping consumer prices. The scheme worked well when oil prices stood
at $10 a gallon, but when global oil and gas prices rose, utilities were simply
unable to raise their prices sufficiently to recoup input costs. In some instances, during high demand
periods, wholesale rates have peaked at 100 times normal prices. Legally forbidden from passing on their high
costs to consumers, utilities reduced output and suffered serious financial
woes. This absurd situation quickly
engendered a devastating financial crisis for California’s energy utilities,
and two of the largest companies have teetered on the edge of bankruptcy over
the past year. The private utilities
PG&E and the Southern California Edison now have debts exceeding $11 billion.
16. California has suffered several months of
rolling black-outs that have had a deadening impact on business and
manufacturing. Companies like Oracle
have gone so far as to purchase generators as a hedge against the state’s
increasingly unreliable power network, and some industry executives have
suggested that the growing crisis is making California a less attractive place
for investment. Analysts suggest that
these events have added a substantial risk premium to any company that would
contemplate using the state as a manufacturing base, and this is likely to
encourage potential investors to look elsewhere.
17. A second problem with California’s approach
is that it has deprived the market of a highly effective price mechanism for
coping with shortages. When conditions
of scarcity characterize the market for a much-needed good, naturally the
prices should rise. This compels
consumers to make necessary but tough decisions resulting in declining use of
that commodity insofar as this is possible, and as a result, the price changes
encourage both conservation efforts and broader incentives for tapping
alternative energy sources.
California’s reform seems to have neglected this fundamental dynamic.
18. While software design may be less
energy-intensive than steel production, the rapid pace of California’s service
sector-based growth and continued population expansion has resulted in ever
mounting energy demands but relatively static power supplies. Because of very strict environmental
regulation, California has not added to its energy generation capacity over the
last fifteen years, despite the economy’s unprecedented growth during that same
period. Simply put, it has been
impossible to win approval for the construction of new power plants, while high
regulation has made the cost prohibitive, according to California
utilities. There is therefore little to
be done in the short to medium term to bolster electricity supply in California
beyond importing electricity from neighbouring states in the West. But this has had the effect of “regionalizing”
the crisis, and there are currently concerns about impending water shortages
throughout the western United States this summer as a result of the increased
demand on hydro-electric generation.
Some energy analysts believe that California’s energy problem is not
unique; other regions in both Europe and the United States could face shortages
in years to come if more generating facilities are not constructed.
19. Indeed, the California crisis has provided
OECD countries with a glimpse of the chaos and the potential economic impact
that poor energy planning can provoke.
It is has certainly raised concerns in Europe, which is planning to
deregulate electricity markets throughout the Union. EU energy plans avoid some of the traps into which California’s planners
plunged and, importantly, include an increase in generator capacity in order to
meet future demand. The EU has also
steered clear of price capping. EU
plans call for sharp distinctions between energy suppliers and transporters;
more clear border tariff rules; the opening of energy grids; greater
competition among transmission systems operators, energy producers and
suppliers; and allowance for long-term supply contracts - something that
Californian rules had forbidden. The EU
is also pressuring companies not to honour supply contracts forbidding them to
sell electricity and gas across national borders. It is investigating several contracts signed between EU-based
companies and Gazprom that allegedly include restrictive resale clauses.
20. Current EU legislation calls for only one
third of the electricity and gas markets to be opened by 2003 and 2008
respectively. Several states have
already exceeded these levels. The
United Kingdom has already deregulated its national market, and consumer
prices there have fallen as a result. The EU’s Energy Commissioner, Loyola de
Palacio, has argued that the percentage of electricity sold across borders in
Europe is currently too low and insufficient to generate the kind of
competition that might drive down costs and prices. She has strongly encouraged several EU governments to open
commercial electricity markets to full competition within three years. But a number of countries including France
have cited the California case as justifying a slower approach to
liberalization. France is committed to open just 33% of its market by 2003; the
minimum established by the EU’s 1996 liberalisation directive. Britain and Spain have called for full
liberalisation by 2003, while Germany and the Netherlands want a liberal market
system in place by 2004. The Commission
is seeking the full opening of electricity and gas markets for business users
by 2003 and 2004 respectively, and for all consumers by 2005.
21. By revealing the kind of chaos energy
shortages can spark, the crisis in California has provided a backdrop for the
Bush Administration’s first forays into the energy debate. In his first week in office, President Bush
appointed a Cabinet-level task force to develop a strategy to cope with
long-term energy supply concerns. US
officials have continually pointed to the situation in California and OPEC’s
supply cuts as a harbinger of things to come if more drastic measures are not
taken to increase energy supplies.
Citing their concerns that the United States is becoming too dependent
on imported energy, President Bush and his Energy Secretary, Spencer Abraham,
have suggested that the government will consider opening the Arctic National
Wildlife Refuge (ANWR) to exploration.
According to US Geological Survey estimates, ANWR holds between 5.7
billion and 16 billion barrels of recoverable reserves. Exploration in that pristine and remote
territory has been blocked for years because of environmental concerns. The oil industry and the Bush administration
argue that extraction will not upset the local environment - a notion that
environmental groups in the United States do not accept.
22. While the intimation of possible oil
drilling in ANWR has generated controversy in the United States, an
international furore has emerged over the decision by the Bush administration
to rule out signing the Kyoto Protocol on global warming. The Administration has justified the
decision to walk away from Kyoto because of: 1) potential costs to American
industry, 2) insufficient consideration of the beneficial effects of carbon
dioxide consuming forests and the lack of strong provisions on pollution
trading, 3) the fact that developing countries including China and India were
excluded from its strictures, 4) because very few OECD countries were
realistically placed to meet the targets it had established - targets which
were based on levels of output in 1990.
23. Negotiators needed a decade to develop the
Kyoto Protocol - an effort aimed at reducing carbon dioxide emissions and
thereby counteracting the effects of global warming. While the Clinton
Administration had announced its support for what it nevertheless labelled a
flawed treaty, it had not yet submitted the Protocol to the Senate, which, in
turn, had indicated that it would not ratify the agreement as it stood. The election of President Bush marked a sea
change in the American position. The
Bush administration has turned aside pleas from European Union officials to
reconsider its decision not to sign the treaty, while claiming that it will
develop alternative proposals far less costly to the US economy. European officials had only recently gained
assurances from Christine Todd Whitman, head of the Environmental
Protection Agency, that the Administration would, in fact support Kyoto.
24. The debate is critical because it involves
fundamental considerations of energy policy, economic ambitions, environmental
strategy, and invariably US relations with its closest allies. While the Administration points to the
California crisis as a harbinger of what lies ahead if the US economy is not
able to secure and distribute adequate energy supplies, its opponents - and
particularly environmental groups - contend that the government is exaggerating
the energy challenges to advance a pro-industry agenda fuelled on cheap energy,
limited conservation and reduced environmental safeguards.
25. Similar charges against the administration
are aired in Europe as well, but some energy analysts suggest that outrage
seems a bit disingenuous, as the American administration simply gave voice to
certain concerns about that treaty, to which Europeans themselves admitted sotto voce. Indeed, there has been little discussion of the costs in Europe
involved in achieving emissions targets that were based on 1990 output
figures. Both Europe and the United
States have achieved substantial GDP growth since then, and achieving the Kyoto
targets could well prove extremely costly. Yet, those potential costs have yet
to be fully examined by the general public.
26. Europe’s own problems with meeting the
standards set out in Kyoto should not be discounted. Energy consumption in Europe is already taxed at a very high
rate, and this past summer, a genuine tax revolt began to unfold as the global
price of energy soared. That revolt was
thwarted in several countries by providing for special subsidies for groups
that had been particularly hard hit - despite the pleas of environmental groups
and Green Parties not to give in. It is
therefore not clear how much economic and political manoeuvre room the
Europeans would have to add substantially more costs to energy use. Simply put, there has yet to be a full-blown
public debate about the specific measures that would need to be undertaken to
meet the Kyoto targets. It is likely
that certain European leaders were not looking forward to leading that
particular discussion. The EU, in fact,
criticized a number of countries for doing virtually nothing in recent years to
reduce emissions. A cynic might suggest
that the Bush decision and the tone in which it was articulated proved a
godsend for certain European governments that wanted neither to face up to the
costs of Kyoto nor to be seen backing away from the treaty. President Bush essentially put off the day
of reckoning while making the United States the scapegoat for the failure to
take action.
27. That said, it must be pointed out that the
United States consumes far more energy per capita than Europ,e and emits twice
as much carbon dioxide per head as the average in developed countries and ten
times the average in the developing world. This is not only a function of America’s
high level of development and economic dynamism. It is also due to America’s unique approach to energy
policy-making and particularly the very low level of energy taxes American
consumers face. While on the surface
such taxes seem like inherently domestic matters, in fact they lie at the core
of a significant if understated trans-Atlantic policy debate that reflects
starkly different political-economic cultures.
Clearly, high energy taxes in Europe add significantly to the price of
energy and constitute a critical source of revenue for European states. Those taxes, in turn, inspire a range of
rational consumer and state responses - most of which involve efforts to
minimize consumption. Europe’s lower
levels of energy consumption are manifested not only in the difference in the
size of cars, but also in the highly developed rail infrastructure and even in
the relatively greater restrictions on urban sprawl.
28. From the European perspective, there is
perfectly justifiable economic rationale for energy taxes, because
environmental degradation constitutes an externality that the market itself
will not introduce into the price. The
government thus steps into the breach with a tax that ensures that the final
price at the pump better reflects the true cost of using that energy. Some would even argue that such a tax should
also incorporate the additional costs involved in securing and defending open
supply lines for oil, gas and electricity.
Many Europeans - and not a small number of Americans for that matter -
believe that very low energy taxes in the United States, coupled with neglected
public transit infrastructure and urban sprawl, have transformed that country
into an intensive gasoline and oil guzzler.
American energy consumption drives up global prices, increases Western
vulnerability to developments in highly unstable regions like the Middle East,
and makes it very difficult to forge effective environmental strategies to cope
with real challenges like global warming.
Europe’s reaction to the American decision to opt out of the Kyoto
treaty on global warming was thus partly informed by this broader resentment of
America’s energy policy and by what many see as its neglect of a legitimate set
of costs associated with energy use.
Europe sometimes feels that it is taking on the burden of conservation
while the United States rakes in advantages derived from “artificially” cheap
energy.
29. To some extent, much of this rings true,
but it is also important to recognize the counter-argument that resonates quite
strongly in the United States. That
argument is that market prices already reflect relative scarcity levels and
generally factor in future supplies, albeit in a discounted form. States
invariably have less knowledge than the market, and bureaucrats are thus
congenitally ill-equipped to outguess the market. Efforts to do so are invariably arbitrary, and thus high energy
taxes tend to be driven more by the state’s quest for easy revenue than any
legitimate effort to calibrate taxes to incorporate externalities. American energy policy is indeed strongly
conditioned by public resistance to energy taxes. Generally speaking, advocacy
of a higher gasoline tax in American politics is tantamount to political
suicide, particularly as the car remains essential to transportation in
American suburbia and outlying rural areas and has become so closely identified
with the notion of individual freedom.
Yet, despite this hands-off approach, the United States has made
important gains in reducing the ratio of GDP to energy consumption. Even though US emission of greenhouse gases
has risen only by an estimated 10% since 1990, the American economy has grown
far more than 10% in that same period, so the ratio of emissions to output has
declined substantially in the United States.
30. What is disappointing in the end is that
the key players in the Kyoto process were not able to make essential
adjustments that factored in political and economic realities. And it is also unfortunate that the American
withdrawal from the process assumed such a unilateral tone as to raise
questions about the level of Administration concern about what many scientists,
policy-makers and the general public perceive as a major global challenge. In an important sense, the US action has
made it easier for European governments to claim strong environmental
credentials in comparison with the United States without actually having
to do anything to prove it. Indeed, if
some of the warming scenarios that scientists have drawn out actually unfold
over the next twenty to fifty years, the costs will dwarf the kinds of costs
involved in reducing emissions today.
The challenge lies in making those costs both broadly understood and
“internalised”, so that rationale cost benefit analysis will make the need for
more dramatic emissions control generally understood as a logical policy
choice. To some extent, the insurance
community has already begun to do this, and this suggests that the market
itself is growing attuned to the danger.
But it is ultimately the responsibility of national and international
leaders to translate this awareness into public policies that will avert a
highly costly environmental catastrophe.
31. As NATO member governments come to grips
with the broader implications of recent energy developments, national energy
strategies will likely have to be revamped.
As suggested above, energy policy-making in recent years has been
characterized by a degree of complacency informed by very low prices and casual
assumptions about declining energy needs for service-based economies. But a longer-term view would suggest that
Western societies confront serious energy and - by extension - environmental
challenges which are likely to shape profoundly their foreign and economic
policies. Several recent studies have
confirmed a number of worrisome trends.
32. First of all, although OECD countries
currently consume the largest share of global energy, the developing world is
fast catching up. Within the next
twenty years, for the first time the OECD will consume less energy than
developing countries. This can be
explained by several trends: the mounting share of the less energy-intensive
service sector in OECD countries; product manufacturing cycles in which old
energy intensive industries like steel production are increasingly moving to
the developing world; technological advance in the developed world which leads
to new energy efficiencies; and the phenomenal growth of many developing
countries, and particularly China which is emerging as a major energy consumer.
33. It
is also clear that over the next 20 years, global energy demand will increase
substantially. According to a recent
long-range strategic assessment made by the Central Intelligence Agency, global
economic growth and population increases will lead to a 50% increase in the
demand for energy over the next 15 years.
Total oil demand will rise from roughly 75 million barrels per day in
2000 to more than 100 million barrels in 2015, an increase almost as large as
OPEC's current production. Over the same period, natural gas use will rise by
more than 100%. Most analysts also
assert that fossil fuels will remain the primary source of energy over the next
fifteen years. While technologies for
exploiting alternative energy sources have improved, they are likely to remain
too costly to push aside fossil fuel use, and governments are unwilling to
subsidize the use of these technologies to the point where they might overtake
fossil fuel use. This could change, however; fossil fuel prices were to shoot
up over the long term. But according to
the CIA, “80% of the world's available oil still remains in the ground, as does
95% of the world's natural gas.” The
problem lies in getting that oil to market - something that is not always
economically, politically or technologically feasible.
34. At the same time, oil production in North
America and Europe will decline almost inexorably. This will invariably result in greater reliance on imports from
less stable regions including the Middle East, Russia and the Caspian
basin. The Persian Gulf’s share of
world oil production is expected to increase over the next twenty years, and
forecasts suggest that its output will have to rise by 80% in order to meet
demand. In order for this to happen,
Iran and Iraq will have to significantly boost production and exports -
something that will not be possible without copious foreign investments and an
easing of sanction regimes that have been in place for some time. This is precisely why the Bush
Administration has been hinting that it will reassess sanction policy towards
these two countries.
35. The Caspian too will increase its share of global
oil and gas supplies, but short of major discoveries, output from the Caspian
littoral will not come close to Persian Gulf production levels. The challenge here will lie not only in the
region’s political stability, but also in getting oil and gas to market from
this remote region. Turkish authorities
have made it known that they want to limit oil trans-shipment through the
Bosporus and Darndanelles Straits, and this has been a principal justification
for building the highly costly Baku-Cehan pipeline. Yet, there are also Russian and Iranian options for moving oil
and gas out of the region to global markets, and these should not be written
off.
36. Another noteworthy trend is that natural
gas use will rise substantially, particularly for electrical power
generation. Unlike oil, gas - unless
liquefied - is not a perfectly fungible commodity, and can only be exported
from its sources by pipeline. The
market for gas thus tends to be more segmented. Here too, the Caspian could prove an important source of gas at
least for Turkey, and even further afield if the proper pipeline infrastructure
is put in place.
37. The strategic implications of all these
changes are dramatic. They imply an
even greater dependence of the global economy on imported oil and increasing
tanker traffic on the sea-lanes.
Consequently, importing countries’ security requirements will inform
continued efforts to defend those sea-lanes and this, in turn, will likely
result in ongoing reliance on naval forces among the larger powers and
particularly the United States. Chinese
demand for imported oil is growing precipitously, and this has provided its
leaders with one of several rationales for undergoing a substantial naval
armaments program aimed at building a large blue water force. This build-up is of great concern to
American policymakers and has inspired US policy-makers to focus ever greater
attention on the Far East—a concern that was recently manifested in the
spy plane incident over the South China Sea.
That reorientation obviously holds direct implications for the
US-European strategic partnership.
38. The Caspian has emerged as another hotbed
of strategic rivalry that some have characterized as a reincarnation of the
“Great Game” - the strategic rivalry between Victorian Britain and Czarist
Russia for the riches of India and the East. The Caspian-Caucasus is a region
of great energy potential, but it is also beset with instability, disputed
borders and terrible poverty. War and
civil strife have characterized post-Soviet life in Chechnya, Nagorno-Karabakh,
Abkazia and Dagestan. At the same time,
oil and gas have drawn outside powers into the region; yet, the turmoil
continues to inspire caution on the part of foreign investors who must
carefully weigh risk and opportunity.
39. Last year’s energy price rises, as well as
recent oil discoveries in Kazakhstan’s Kashagan field have once again altered
assessments of the region’s energy and economic potential. These developments have certainly bolstered
economic activity and investment in the region, and pipelines that once seemed
uneconomic, like the Baku-Cehan line, have gained a new lease of life. The
United States, has promoted this particular pipe-line to reduce dependence
on Russian and Iranian transhipments and to reinforce the capacity of these
states to resist untoward Russian and Iranian meddling in their domestic
affairs. It also has the virtue of
bypassing the Bosporus and Dardenelles straits, which, according to Turkish
authorities, cannot support additional tanker traffic. The newly opened Caspian oil pipeline from
Kazakhstan to Novorossisk will add even more traffic to the Straits, and
substantial increases in production will require other passageways to blue
water ports. From the perspective of
some analysts, the more pipelines in the region the better, as this will give
exporters several means of getting gas and oil to market from this remote and
unstable region; several pipelines would help accommodate any large increase in
production and ensure continued exports, were any single line blocked for
reasons of war or terrorism. In this
sense, Iran and Russia do offer important transhipment options that the market
will want to consider, even if Western security strategists harbour certain
reservations. The real problem lies in
financing these pipelines and in Iran’s case, finding a diplomatic
accommodation that would make possible an easing of sanctions against it. Finally, just as the sea lanes demand
protection, so too will the new gas-lines, some of which will wind their way
through highly unstable regions. The
countries of Europe will invariably be challenged to prepare responses to
sudden pipeline closures and develop strategies that deter actors from
contemplating such acts.
40. Europe’s rising gas needs will invariably
foster tighter economic ties with Russia and lead to a higher European
dependence on Russia for gas imports.
During the Cold War, concerns about growing European reliance on Soviet
gas proved a genuinely divisive issue within NATO. European governments never accepted the Reagan administration’s
arguments that pipelines would lead to strategic dependence on the Soviet Union
and, in hindsight, they were right.
Obviously today’s post-Cold War world, such concerns have abated, and
Russia is now seen among European leaders as a vital and reliable source of
much-needed gas. Moreover, insofar as
Russia’s economic development is understood as critical to its becoming a
contributor to a more stable global order, the development of its capacity to
export gas and oil is certainly welcome.
Recent energy price rises have had a salutary effect on the Russian
economy which is experiencing fairly impressive growth. Russia currently furnishes Western Europe
with roughly 42% of its gas imports, and this figure will certainly increase
over time. In many respects, the energy
relationship between Europe and Russia is a symbiotic one; Russia needs
European investment to develop its energy potential and Europe needs Russian
gas to meet its energy requirements.
The Russian option, moreover, offers yet another means to reduce
somewhat the continent’s dependence on Middle Eastern energy; the development
of this trade can be understood as enhancing rather than diminishing European
security.
41. Nevertheless, concerns about undue reliance
on Russian energy are still evident, particularly in Eastern Europe. Some strategic analysts feel that when “push
comes to shove”, Russia simply will not refrain from using its vast gas and oil
reserves as a means to exercise political and diplomatic leverage. Georgia, Moldova and Ukraine can all attest
to Russia’s willingness to play the energy card for diplomatic and economic
advantage. Although Russia has had a
legitimate gripe about the failure of these countries to pay fully for Russian
oil and gas, Russian officials have also tied energy relations to unrelated
matters such as the future status of Russian military bases in Georgia or
Georgia’s role as a conduit of non-Russian Caspian oil and gas - a role Russia
wishes Georgia would not play. There is
also some evidence to suggest that Russia recently cut off supplies of gas to
Georgia as part of a complex effort to help a Russian company, UES, win a gas
supply contract in Turkey, although Russian officials have vehemently denied
this. Georgia’s experience points to
the dangers of any country that becomes overly dependent on a particular energy
supplier. It is precisely for this
reason that the Baltic countries and Ukraine have worked to diversify their
energy supplies and thus to reduce their vulnerability to political pressure
stemming from energy dependence on Russia.
Finally, it is worth considering the role Gazprom plays in Russian
politics and its recent part in the ultimately successful effort to squelch the
Media Most Company that had run newspapers and television stations critical of
President Putin. The line between
energy interest and politics in Russia is indeed nebulous. All this suggests that Europe should
exercise some caution, and insofar as is possible, transform gas links with
Russia into a foundation for a broader set of exchanges aiming to reinforce its
highly fragile democracy. While the
developing gas relationship between Europe and Russia is clearly of mutual
benefit, one goal for Europe - and North America for that matter - is to reduce
dependence on any single energy supplier.
This also implies the existence of vital strategic and economic
incentives in developing alternative and renewable sources of energy, as well
as importing oil and gas from as broad a range of suppliers as is physically
and economically feasible.
42. Finally, one must consider the nuclear
alternative. The recent rise in energy
prices combined with global warming concerns has reopened a debate in the
United States about nuclear power’s place in the America’s overall energy
strategy. No nuclear power plant has
been built in the United States since 1979 because of local public
resistance and high cost barriers.
Those cost barriers, however, have become less formidable, and the
industry is undergoing something of a renaissance, although no new plants are
currently on the drawing board. In
Europe the picture is far more diverse. Germany, for example, has decided to
phase out nuclear power, while the latter remains a bedrock of French energy
policy. Long-term price trends,
strategic considerations, public perceptions and technological advances will
all play a part in the future of this industry in Europe as well.
43. Several recent studies have concluded that
oil and gas will remain the most important sources of global energy over the
next twenty years. At the same time,
global economic development will fuel energy demand, despite the declining
correlation between growth and energy use that most OECD countries have
experienced since 1979. The developing
world’s rocketing demand for energy will more than make up for any improvements
in energy efficiency. At the same time,
oil and gas will remain the lynchpin of energy supply, and unfortunately there
seems little likelihood of renewable energy sources, for example, assuming a
central role in supplying energy to the global economy. However, that should not discourage efforts
to develop renewable energy sources which, at the very least, can make a difference
at the margins while providing a hedge in the event of permanently higher oil
and gas prices. Research and
development of solar, wind, hydraulic and thermal energy seems like a very
reasonable investment, particularly in light of the strategic interest in
diversifying supply and given the environmental imperative of developing
cleaner means of generating energy.
44. Western oil and gas production will also
decline over the next 20 years; hence, rising levels of imported energy can be
expected. The Persian Gulf will remain
the lynchpin of the oil supply system and will provide the greatest share of
oil exports. But it will have to
bolster production significantly in order to keep pace with global demand. In practical terms, this will mean far higher
production and export from Iran and Iraq - two states that have been on the
Western black list for the last decade.
Clearly, a review of current sanctions policy should be undertaken. The American administration has begun to do
just this, and its efforts should be encouraged. Many of the sanctions policies put in place over the last decade
have simply proven ineffective and only complicated efforts to bolster oil
supplies.
45. In terms of global oil and gas supplies,
the Caspian could make a difference at the margins as significant oil
discoveries are made and developed and if the infrastructure is in place to get
this oil to market. Thus, energy will
remain a critical element of NATO member country interests and will strongly
condition geo-political strategy for the foreseeable future. Pipeline construction is essential to
getting this energy to market; all options should be explored and more than one
solution embraced. Baku-Cehan is one of
these options, but it should not be the only one. Russia and Iran have legitimate roles to play in the export and
transhipment of oil and gas, and neither can be excluded from the emerging
energy order; put bluntly, their supplies will be critical to meeting global
demand. In Iran’s case in particular,
other strategies need to be developed to encourage this society, which is in
the midst of a serious internal debate about its future, to become a normal
actor in the global community and no longer a pariah.
46. Needless to say, much of the world’s energy
supplies will originate in very unstable regions where the potential for
military conflict remains very real.
The war in Iraq a decade ago revealed how sensitive Western states are
to such a conflict and the potential they have of inducing supply
cut-offs. The international coalition
was cobbled together by shared interest in rejecting Iraq’s unilateral effort
to redraw the boundaries of the states along the Persian Gulf littoral - an
eventuality that would have unleashed great instability in a region that provides
a critically-needed commodity to the global economy. It is not unreasonable to imagine similar scenarios unfolding in
the future, and prudence would suggest that allies continue to consider
individually and collectively these worst case scenarios, even if NATO itself
is not the appropriate forum for doing so.
NATO has made it possible for member government militaries to work
together, and undoubtedly this shared experience was critical to the success of
the Gulf campaign. Protecting ever
lengthening energy supply routes will constitute yet another strategic
challenge - and one that the United States should not be expected to meet
alone. Indeed, over the long-term, this should be seen as a legitimate area of
common European effort as well. This may
well emerge as the core burden-sharing debate of the 21st century.
47. Russia will remain a key energy supplier
for Europe. This could either reinforce
the notion of shared interest with the West or inspire Russian efforts to use
oil and gas as a diplomatic lever. The
health of the European-Russian relationship will largely be determined by
Russia’s capacity to build a democratic order and to develop its economic
potential beyond the energy sector.
European support for these goals is therefore essential, and the current
Presidency of the European Union has endorsed this particular set of
goals. At the same time, Europe should
continue to cultivate other potential energy sources so as to avoid leaving the
continent vulnerable to risks associated with over-reliance on any single
supplier. In the case of gas, this will
be difficult to say the least, because pipelines are needed to get gas to
market. In the final analysis, pipelines
should be seen as a way to build more positive and mutually beneficial relations
between the countries that link them, and not simply and starkly as vehicles
for the commission of strategic blackmail.
48. The emerging geo-political order will see a
reinforcement of several important tendencies.
One of the most compelling of these is that China will emerge as a major
oil and gas importer, and its energy needs will strongly condition its military
posture. A Chinese naval build-up is already apparent, and the Chinese presence
is growing in the Middle East and the Caspian - two regions upon which it will
depend for energy supplies. The
strategic rivalry between China and the United States will grow more intense as
a result. America’s European allies
must accommodate themselves to America’s legitimate global obligations. If it is true that Europe remains America’s
closest ally, it is also true that America’s greatest strategic challenges lie
elsewhere. Managing this paradox will
be an essential challenge to the relationship.
49. Deregulation of gas and electricity markets
in Europe should help drive down costs and increase market efficiency. National oligopolies and monopolies have
reigned for too long and exacted monopoly rents from European consumers. That said, every effort must be made to
avoid the California scenario in which wholesalers pay world market prices
while consumer prices are capped. This is a recipe for financial and energy
disaster. At the same time, generation
capacity both in Europe and the United States will have to rise to meet future
demand; deregulation therefore must ensure that the incentives are in place for
continued generator investment.
50. The global warming problem will not go
away; there is mounting evidence both that this effect is significantly
advanced and worsening, and that it is linked to carbon dioxide emissions. Many (but certainly not all) of the
scientists who dispute this appear to be linked to groups opposed to energy
market regulation; but they provide enough intellectual fodder for those who
want to utterly neglect the challenge.
Western publics are increasingly alarmed by what scientists are telling
them, and Western energy policy will invariably reflect these mounting
concerns. In this sense, the recent
declaration by the American government is not the final word on this matter. A serious discussion is now essential so
that the international community can collectively begin to address the threat
and do so in a transparent and economically viable manner.
51. Clearly, meeting this environmental
challenge will demand a multifaceted approach involving the development and
deployment of ever cleaner power generation and transport technologies, the
development of renewable energy sources, energy conservation, developing public
transportation infrastructure and making cleaner technologies available to
developing countries - the latter is particularly important, as these countries
will surpass the developed world in overall energy demand over the next twenty
years. Those who argue that these goals
are best achieved either by the market or by the state fail to recognize the
importance each brings to the table.
Clearly, market signals strongly condition behaviour, and there is
nothing like a sustained price hike to induce behavioural change. The American car shrank precipitously in the
1980s as a result of gas price shocks, and only the onset of extremely cheap
gasoline over the past decade made the now ubiquitous four-wheeled vehicles the
chosen means of many commuters to drive to and from work. Yet, markets sometimes do a very bad job of
incorporating externalities into the price of key commodities like energy. There are hidden costs to burning energy:
environmental degradation and greater strategic vulnerability with expensive
military force structure implications to name just two. It is perfectly legitimate for states to tax
energy use to better capture these externalities and to encourage the kind of
behaviour that these real costs would dictate.
Energy taxes are therefore not an assault on free market principles, and
European energy taxes should not be seen as such. At the same time, however, there are limits to taxation, and
these became apparent in last summer’s strikes. A frontal assault on global warming will thus clearly require an
extended dialogue with societies about the cost of action weighed against the
cost of inaction. To be frank, this
dialogue has not really begun, and very concrete sets of policy proposals will
be required for it to do so.
(Quadrillion BTU)
|
|
1970
|
1990
|
1995
|
1996
|
2000
|
2005
|
2010
|
2015
|
2020
|
|
Natural Gas
|
36.1
|
72
|
78.1
|
82.2
|
94.8
|
113.8
|
133.3
|
152.5
|
174.2
|
|
Oil
|
97.8
|
134.9
|
142.5
|
145.7
|
157.8
|
176.3
|
195.5
|
215.3
|
237.3
|
Source: Adapted by Anthony H. Cordesman EIA, Internet, July 4, 1996, and
International Energy Outlook, 1998, DOE/EIA-484(97), p. 8 and 135.
(Average Daily Domestic Production vs. Demand in Millions of Barresl Per
Day)
|
|
1990
|
1996
|
2000
|
2005
|
2010
|
2015
|
|
US Domestic Production
|
9.7
|
9.4
|
9.1
|
9
|
8.9
|
8.7
|
|
US Total Demand
|
17
|
18.3
|
19.6
|
21.3
|
22.7
|
23.7
|
|
Industrialized World Production
|
20.1
|
23
|
24.7
|
25.4
|
24.8
|
23.7
|
|
Industrialized World Demand
|
39.5
|
43.4
|
45.6
|
48.4
|
51.1
|
53.3
|
Source: DOE/ EIA, International Energy Outlook, 1998, p.136 and
175.
(Millions of Barrels per Day)
|
|
1990
|
1995
|
1996
|
2000
|
2005
|
2010
|
2015
|
2020
|
|
FSU/ E.Europe
|
10
|
5.9
|
5.7
|
5.9
|
6.7
|
7.8
|
9
|
10.1
|
|
Asia
|
13.8
|
18.3
|
19
|
21
|
24.8
|
28.5
|
33
|
38.4
|
|
Latin America
|
3.4
|
3.9
|
4
|
5.2
|
6.2
|
7.3
|
8.5
|
9.8
|
|
Africa
|
2.1
|
2.3
|
2.4
|
3.1
|
3.7
|
4.1
|
4.6
|
5.1
|
|
Middle East
|
3.4
|
4.1
|
4.2
|
4.4
|
5
|
5.6
|
6.3
|
7.1
|
|
Western Europe
|
12.9
|
14.1
|
14.3
|
14.3
|
14.6
|
14.9
|
15.2
|
15.4
|
|
North America
|
20.4
|
21.3
|
22
|
23.7
|
25.6
|
27.6
|
29
|
30.1
|
Source: Adapted by Anthony H. Cordesman from DOE/ EIA, International
Energy Outlook, 1996, Washington, DOE, EIA 04484(96), May, 1996, p. 92, and
International Energy Outlook, 1998, April 1998, DOE/ EIA-484(97),
Reference Case, p. 136.
Total World Gas Consumption by Region 1990-2015, Trillion Cubic Feet,
EIA Reference Case
|
|
1990
|
1995
|
1996
|
2000
|
2005
|
2010
|
2015
|
2020
|
|
Africa
|
1.4
|
1.7
|
1.8
|
1.7
|
1.9
|
2.4
|
2.9
|
3.4
|
|
Industrial Asia
|
2.6
|
3.1
|
3.3
|
3.3
|
3.7
|
4.1
|
4.3
|
4.6
|
|
Middle East
|
3.6
|
4.7
|
5.2
|
5.4
|
6
|
6.8
|
7.8
|
8.9
|
|
Latin America
|
2
|
2.6
|
2.9
|
3.1
|
5
|
7.2
|
9.8
|
13
|
|
Developing Asia
|
3
|
4.7
|
5.3
|
9.5
|
14.1
|
18.5
|
22.6
|
27.7
|
|
Western Europe
|
10.3
|
12.7
|
14.1
|
16.2
|
19.9
|
23.5
|
27.7
|
32.1
|
|
FSU/ E. Europe
|
28.1
|
23.4
|
23.7
|
26.8
|
31
|
35.2
|
38.7
|
42.7
|
|
North America
|
22
|
25.4
|
26
|
28.5
|
31.5
|
34.4
|
36.9
|
39.4
|
Source: Adapted by Anthony H. Cordesman from DOE/ EIA, International
Energy Outlook, 1996, Washington, DOE, EIA-0484(96), May, 1996, p. 92, and International
Energy Outlook, 1998, April 1998, DOE/ EIA-484(97), Reference Case, p. 137.
(Based on Oil and Gas Journal Forecast for and a World Total of 1,037.6
billion barrels)
|
Gulf
|
65%
|
|
FSU
|
6%
|
|
Europe
|
2%
|
|
S&C America
|
8%
|
|
North America
|
7%
|
|
Asia/ Pacific
|
4%
|
|
S. Africa
|
3%
|
|
N. Africa
|
4%
|
|
Other Middle East
|
1%
|
Source: Oil and Gas Journal, and BP Statistical Review of World
Energy, 1998, p. 4.
(Based on Oil and Gas Journal Forecast for a World Total of 144.76
Trillion Cubic Meters)
|
FSU
|
39%
|
|
Europe
|
4%
|
|
South and Central America
|
4%
|
|
North America
|
6%
|
|
Asia/ Pacific
|
6%
|
|
Africa
|
7%
|
|
Middle East
|
34%
|
Source: Oil and Gas Journal, and BP Statistical Review of World
Energy, 1998, p. 20.
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