Tuesday, September 11, 2007

What Does 'Energy Security' Really Mean?

by dyergin
At the conclusion of last year's G8 summit in Scotland, Russian President Vladimir Putin said to the other leaders of the G8 industrial nations, "We cannot ignore the question of overcoming poverty and the fight against terrorism." But "the key issue for the next summit" would be energy security. Setting the agenda was certainly his prerogative as the incoming "president" of the G8. Moreover, he did it from a unique perspective. For, he added, "If you put together Russia's energy potential in all areas, oil, gas, and nuclear, our country is unquestionably the world leader."

The turbulence in the year since has earned "energy security" its place as the No. 1 item for this weekend's meeting here. There was the huge shock that Hurricanes Katrina and Rita delivered to the Gulf of Mexico energy complex, the continuing loss of 20% of Nigerian oil output from domestic insurgency, Russia's temporary interruption of natural gas supplies to Ukraine at the beginning of this year, the chronic impairment of Iraqi oil output, Hugo Chavez's warnings about cutting off Venezuelan supplies to the United States, and the recurrent threats by some Iranian leaders to unleash an "oil crisis" (even if other Iranians deny any such intent). Fueling the anxiety, of course, has been the 60% rise in oil prices, to the mid-$70s a barrel, since the beginning of last year.

The world has changed much since the concept of "energy security" emerged in the 1970s. But agreeing on its importance is not the same as agreeing on what it means. Consuming countries declare that they want "security of supply"-that is, reliability and availability of energy at reasonable prices. Exporting countries, whether Russia or in the Middle East, turn it around and talk about "security of demand"- sufficient access to markets and consumers to justify future investment (and protect their national revenues).

Probe further and the differences become even sharper. For Russia, energy security is about the state's retaking control of the "commanding heights" of the energy industry and extending that control downstream, over the critical export pipelines that provide a substantial part of government revenues. For Europe, today's concerns center not on oil, but on natural gas and on the debate about dependence on gas from Russia. For Japan, the question is quite different-how to compensate, in running the world's second largest economy, for the absence of virtually any domestic resources. For China and India, it is assuring that energy does not hold back the economic growth they need for development and to avoid social turbulence.

In the United States energy security has had a double focus. One is offsetting any future Middle East-style disruptions. The other is achieving that oft-cited goal of "energy independence"-first set out by Richard Nixon in 1973-even as the United States in the years since has gone from importing a third of its oil to 60%.

So what, then, are the principles and policies that will underpin "energy security?" Some of them are embedded in the security system that was set up in the 1970s to either avoid or mitigate disruptions such as the 1973 oil embargo. There was a further objective, now generally forgotten: to avoid the kind of bruising political and economic scramble that threatened to fracture the Western alliance. This system included the establishment of the International Energy Agency, the creation of emergency stockpiles such as the Strategic Petroleum Reserve, increased communication and much better information, and the development of procedures for sharing supplies in the event of a disruption (the last of which was activated briefly to offset lost supplies after Katrina and Rita). If there was a single overarching principle, it was the importance of diversification, in terms both of sources of oil and in increased use of other energy supplies. And this principle of diversification remains the essential starting point for any thinking on energy security.

But the system must incorporate new realities. First, energy security needs to be extended to the safety of the whole infrastructure and supply chain-recognizing the vulnerabilities that come from terrorism, war, brigandage, and natural disasters. That is the lesson of Katrina and Rita. It is not just oil and gas coming out of the ground; it is also pipelines, refineries, and, critically, electricity, which is fundamental to everything else. Global supply chains are only going to become more complex in the years ahead. Today, about 40 million barrels a day of oil cross oceans in tankers; within 15 years, that will be 70 million barrels. Over the same period, liquefied natural gas volumes will triple on the high seas. And there are critical chokepoints: 20% of the world's oil supplies flow through the Strait of Hormuz; 80% of Japan's and Korea's oil and half of China's pass through the Strait of Malacca.

Given their importance and scale, the safety of these supply chains requires a "security margin." It also requires increased cooperation among governments, and between companies and governments. This last is no easy thing; nor is it clear who will bear the additional costs.

A second, urgent need is to bring China and India into the energy security system. There is much talk of a clash between the United States and China over oil. But there is nothing inevitable about it. Commercial competition need not turn into national rivalry. A fundamental reason for establishing the International Energy Agency in the 1970s was to modulate that mad scramble to preempt barrels. This contest threatened not only to rip apart the Western alliance, but also sent oil prices - after the Iranian Revolution-to what is still their highest level ever. The innovations of the 1970s transformed the scramble into more durable cooperation. That same kind of approach is needed now with the emergence of these two huge (and anxious) consumers in the world market.

The investment framework itself is part of energy security. Reasonable, stable, and predictable investment regimes are required if funds and technology are going to flow into the development of new resources. Governments that focus on short-term revenue maximization will shortchange themselves, as well as their consumers, over the longer term. That definitely needs to be on the table in St. Petersburg.

Energy security should also include enhanced efficiency in the use of energy. There is much more to accomplish here, and it too ought to be a major topic at the G8 summit. US energy efficiency has doubled since the 1970s. A great contribution will result from greater efficiency in China and Russia (which use far more energy per unit of gross domestic product than does the United States), and in Western Europe and Japan (which can become more efficient).

Diversification can go much farther than development of "non-OPEC" fuels. Today, there is a more robust menu of alternatives, including the making of liquid fuels either out of natural gas or from the application of biology in ways that are still being developed in the laboratory.

There's another principle that is important and perhaps startling: self-restraint. When disruptions occur, tempers flare, suspicions mount, and the specter of manipulation comes quickly to the fore. In such circumstances the temptation becomes very strong for governments to manage markets. But so often the most sensible policy is to resist that temptation. Large, flexible markets are the shock absorbers that promote energy security. Disruptions are disruptions; once they occur, the objective is to rebound as quickly as possible. Markets, with their decentralization and ingenuity, can speed adjustment more quickly and effectively than more interventionist approaches.

Finally, energy security requires a larger perspective. Whatever may be said about energy independence, the truth is that there is only one global oil market, and the United States is part of it. Moreover, energy markets, like the rest of trade and finance, are ever more internationally entwined. Energy security does not reside in a realm of its own, but is part of the larger pattern of relations among nations. How those relations go will do much to determine how secure we are when it comes to energy.

About the Author

Daniel Yergin, chairman of CERA, received the Pulitzer Prize for "The Prize: The Epic Quest for Oil, Money & Power" and the United States Energy Award for lifelong achievements in energy and the promotion of international understanding. Vist CERA.

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