UNCONVENTIONALS: THE NEW GEOGRAPHY OF OIL AND GAS
Technology is unlocking what were previously unavailable energy resources.
Source: IHS CERA
13
THE SECURITY OF ENERGY
Energy security may seem like an abstract concern—certainly important, yet vague, a little hard to pin down. But disruption and turmoil—and the evident risks—demonstrate both its tangibility and how fundamental it is to modern life. Without oil there is virtually no mobility, and without electricity—and energy to generate that electricity—there would be no Internet age.
But the dependence on energy systems, and their growing complexity and reach, all underline the need to understand the risks and requirements of energy security in the twenty-first century. Increasingly, energy trade traverses national borders. Moreover, energy security is not just about countering the wide variety of threats; it is also about the relations among nations, how they interact with each other, and how energy impacts their overall national security.
The interdependence of energy has been a fact of international life for centuries. Beginning in the sixteenth century, the boom in the need for wood—used for shipbuilding and construction but, most important, for domestic heating—led to the integration of Norway and Sweden, and then North America to some degree, into the European economy.1
But the point at which energy security became a decisive factor in international relations was a century ago, in the years just preceding the First World War. In 1911 Winston Churchill, then First Lord of the Admiralty, made the historic decision, in his words, to base Britain’s “naval supremacy upon oil—that is, to convert the battleships of the Royal Navy from coal to oil.” Oil would make the ships of the Royal Navy faster and more flexible than those of Germany’s growing navy, giving Britain a critical advantage in the Anglo-German naval race. As Churchill summed it up, switching to oil meant “more gun-power and more speed for less size or cost.”2
But the move to oil created a new challenge: a daunting problem of supply. While the U.S. Navy was behind the Royal Navy in considering the move from coal to oil for its battleships, it at least could call on large domestic supplies. Britain had no such resources. Conversion meant that the Royal Navy would rely not on coal from Wales, safely within Britain’s own borders, but rather on insecure oil supplies that were six thousand miles away by sea—in Persia, now Iran.
Critics argued at the time that it would be dangerous and foolhardy for the Royal Navy to be dependent upon the risky and insecure nation of Persia—what one official called “an old, long-mismanaged estate, ready to be knocked down.” That was hardly a country on which to rely for a nation’s most vital strategic resource.
Churchill responded with what would become a fundamental touchstone of energy security: diversification of supply. “On no one quality, on no one process, on no one country, on no one route, and on no one field must we be dependent,” he told Parliament in July 1913. “Safety and certainty in oil lie in variety and variety alone.” That precept has proved itself again and again.3
THE RETURN OF ENERGY SECURITY
Since the start of the twenty-first century, a periodically tight oil market and volatile prices have fueled new concern about energy security. Other factors also add to the concern: the instability in some oil-exporting nations, jihadist terrorism, the rebirth of resource nationalism, fears of a scramble for supplies, the costs of imported energy, and geopolitical rivalries. The turmoil that swept over much of North Africa and the Middle East in 2011 disrupted supplies and added a fear premium to the oil price. Underlying everything else is the fundamental need of countries—and the world—for reliable energy with which to power economic growth.
Energy security concerns are not limited to oil. Natural gas was formerly a national or regional fuel. But the development of long-distance pipelines and the growth of liquefied natural gas (LNG) have turned natural gas into much more of a global business. Electric power blackouts in North America—such as the one that shut down the northeast of the United States in 2003—and in Europe and Russia, generate worries about the reliability of electricity supply systems.
Hurricanes Katrina and Rita, which struck the Gulf of Mexico’s energy complex in a one-two punch in 2005, created something that the world had not seen, at least in modern times: an integrated energy shock. Everything seemed connected, and everything was down at the same time: oil and natural gas production and undersea pipelines in the Gulf of Mexico, and—onshore—receiving terminals, refineries, natural gas processing plants, long-distance pipelines, and electricity. The storms showed how fundamental was the integrity of the electricity system on which the operation of everything else depended, be it the refineries and communications systems, or the pipelines that take supplies to the rest of the country—or the gas stations, which lacked the electric power to operate their pumps. The huge earthquake and tsunami that struck Japan in 2011 killed more than 15,000 people, devastated a major part of the country, and set off a nuclear accident. It also took down the region’s power system, knocking out services, immobilizing communication and transportation, disrupting the economy and global supply chains, and paralyzing efforts to respond to the tragedy.
In China, India, and other developing countries, chronic shortages of electric power demonstrate the costs of unreliability. The Internet and reliance on complex information-technology systems have created a whole new set of vulnerabilities for energy and electric power infrastructure around the world by creating entry paths for those who wish to disrupt those systems.
THE DIMENSIONS
The usual definition of energy security is pretty straightforward: the availability of sufficient supplies at affordable prices. Yet there are several dimensions. First is physical security—protecting the assets, infrastructure, supply chains, and trade routes, and making provision for quick replacements and substitution, when need be. Second, access to energy is critical. This means the ability to develop and acquire energy supplies—physically, contractually, and commercially. Third, energy security is also a system—composed of the national policies and international institutions that are designed to respond in a coordinated way to disruptions, dislocations, and emergencies, as well as helping to maintain the steady flow of supplies. And, finally and crucially, if longer-term in nature, is investment. Energy security requires policies and a business climate that promote investment and development to ensure that adequate supplies and infrastructure will be available, in a timely way, in the future.
Oil-importing countries think in terms of security of supply. Energy-exporting countries turn the question around. They talk of “security of demand” for their oil and gas exports, on which they depend to generate economic growth and a very large share of government revenues—and to maintain social stability. They want to know that the markets will be there, so that they can plan their budgets and justify future levels of investment.
THE LIMITS OF “ENERGY INDEPENDENCE”
In the United States, the issue of energy security often gets framed in terms of energy independence. That phrase has been a political mantra since first articulated by President Richard Nixon in his November 1973 “Project Independence” energy policy speech. Just three weeks earlier, an unthinkable—and yet also foreseeable—event had occurred. The Arab oil exporters, wielding the “oil weapon,” had embargoed oil supplies to Western countries in response to the United States’ hurried resupply of weapons to a beleaguered Israel, reeling from a surprise attack on Yom Kippur in October 1973. Oil prices were on a trajectory to quadruple. In his speech, Nixon deliberately modeled his Project Independence plan on the goal that his old rival John F. Kennedy had set for the Apollo project in 1961, of “landing a man on the moon and returning him safely to the earth” within ten years. But Nixon sought to outdo Kennedy, pledging in his own speech that the United States would “meet our own energy needs without depending on any foreign energy source”—and do it not in ten years, but in seven.
The phrase not only stayed in the speech but has remained part of the political vocabulary ever since. Every president after Nixon has evoked energy independence as a prime objective. It resonates powerfully with the American public and comes imbued with a nostalgia for a more manageable time when prices were low and the United States really could go it alone. After all, the United States had once been the world’s number one oil exporter.4
As events have turned out, getting a man on the moon proved easier than making a nation energy independent—or at least oil independent. (In terms of overall energy—including natural gas, coal, nuclear, and renewables—the United States was 78 percent self-sufficient in 2011.) In the almost four decades since Nixon’s speech, the United States has gone from importing a third of its oil to importing, on a net basis, to about 60 percent at the peak. In 2011 imports had declined to about 50 percent.
Is energy independence a realistic goal for a country with a $15 trillion economy that is deeply enmeshed in the global economy? Some argue that the term “energy independence” is misconstrued, that it should not be taken as meaning virtually import-free, but rather as connoting “not vulnerable.” Generally, however, it is understood to mean self-sufficiency. Yet its promotion, no matter how compelling, can lead to expectations about quick fixes and easy adjustments that are at odds with the realities of the U.S. energy position and the complexity and scale of its energy system. The result can be disappointment and cynicism that, together, drive cycles of inconsistency in energy policy and leave the United States no less vulnerable. Overemphasizing something that is an aspiration, rather than a goal that can be realized in a reasonable time frame, can corrode the international relations that are critical to energy security in an interdependent world. And it runs the risk of diverting attention from the more complex agenda of energy security. But perhaps the imperatives of political communication require the mantra of energy independence. As one senator put it, “Energy independence really means energy security.”5
STRATEGIC SIGNIFICANCE
The 1973 oil crisis may have provided the proof that the era of energy self-sufficiency for the United States was already over. Yet it seemed that most Americans did not know, at least until the crisis, that the United States imported oil—or they simply did not believe it. Thus, they concluded, the price surge had to be the result of price manipulation by oil companies. Nor did they know that the gas lines in which they waited (and in which they were to wait again in 1979, after the Iranian Revolution) were mainly the result of government price setting and allocations that prevented supplies from getting to the cities where they were needed, and instead sent them to the countryside, where they were not needed. Those gas lines set off a chain reaction of anger, accusations, and rumors of all kinds (“tankers brimming with oil were circling offshore, just beyond the horizon”), multiple congressional hearings, many investigations, acrimonious battles over price controls, and a tumultuous ocean of litigation.
The shock was hardly limited to the United States. The embargo—and the massive disruption that it engendered—created surprise, panic, chaos, shortages, and economic disarray around the world. It generated a mad scramble for oil among companies, traders, and countries. Government ministers climbed on planes and personally scoured the world for petroleum supplies. The shock was further aggravated by what it seemed to portend—a massive shift in the global political and economic balance of power away from the importing countries and the “North” scorned to the exporters and the “South,” to what was then known as the Third World.
Among the Western governments themselves, the embargo created enormous strain and antagonism as they struggled to respond, blamed one another, and sought to outmaneuver each other in securing supplies. Some sought special relationships with the exporting countries that would give them what they thought would be privileged access to supplies. Indeed, this was widely regarded as the worst crisis, and the most fractious, to afflict the Western alliance since its foundation after World War II.
The acid spirit of the times was captured during the hurriedly convened Washington Energy Conference of 1974 when the French foreign minister, angry that the other European countries were cooperating with the United States, greeted his fellow European ministers with “Bonjour, les traîtres”—“Hello, traitors.”6
TOWARD AN INTERNATIONAL REGIME
Yet out of the rancorous Washington energy conference emerged the International Energy Treaty of 1974. It outlined a new energy security system that was meant to deal with disruptions, cope with crises, and avert future bruising competitions that could destroy an alliance. It provided for coordination among industrialized countries in the event of supply interruptions, and encouraged parallelism and collaboration among their energy policies. At the same time, it was meant to serve as a deterrent against any future use of an “oil weapon” by exporters. That system—refined, updated, and broadened in the years since—remains the foundation for energy security today and provides the ballast of confidence during times of uncertainty and danger. At its most basic, this system is meant to keep member nations supplied with energy and the global economy functioning, and thus prevent deep recessions—or worse.
The treaty established the International Energy Agency (IEA) as the main mechanism for meeting these objectives. The IEA was also meant to provide a common front for the industrial countries and thus counterbalance OPEC, the Organization of Petroleum Exporting Countries. OPEC had been founded in 1960 after the major oil companies cut the price of oil, the major source of income for the countries. In the first decade after its founding, OPEC had labored in obscurity. Indeed, it even failed to gain diplomatic recognition from the Swiss and ended up having to move its headquarters from Geneva to Vienna. But at the beginning of the 1970s, with the tightening oil market and rising nationalism, the major oil-exporting countries took control of the world market, and OPEC was their mechanism to do so. So dominant did OPEC appear to be in the mid-1970s that some spoke about an “OPEC Imperium.” The IEA was intended to provide a means for the consuming countries to counteract that new imperium.
Now headquartered on the Left Bank in Paris and looking up from its windows toward the Eiffel Tower, the IEA currently numbers 28 industrial countries as members. It provides continued monitoring and analysis of energy markets, policies, technologies, and research. As such it operates as a kind of “energy conscience” for national governments.
EMERGENCY STOCKS
One of the IEA’s core responsibilities is to coordinate the emergency sharing of supplies in the event of a loss of supplies. Under the International Energy Treaty, each member is meant to hold strategic oil stockpiles, either government-owned public stocks, such as the Strategic Petroleum Reserve in the United States, or in government-controlled stocks that private companies are required to hold. These stocks can be released on a coordinated basis in the event of a disruption and can be complemented, in a severe disruption, with measures to help temporarily bring down demand. Of course, it is up to national governments to decide whether to implement any of the measures.
Currently, IEA nations have about 1.5 billion barrels of public stocks, of which about 700 million barrels are in the U.S. Strategic Petroleum Reserve. Were Iranian exports to disappear from the market, the 1.5 billion could compensate for the shortfall for more than two years.
The U.S. Strategic Petroleum Reserve (SPR), along with the other IEA stocks, can be thought of as a giant insurance policy. Yet, often enough, when prices rise at the gasoline pumps, so do temptations and calls to “do something”—which means release oil from the SPR in order to bring prices down. That would have the effect of turning the reserve into a de facto tool for p
rice controls. Tempting, for sure, but not the wisest policy.
Releasing oil under those circumstances would prevent price signals from reaching consumers with the message that there is a problem in the marketplace so that they can modulate their consumption. That could make a bad situation get worse. It would also drain oil from the reserves that might be needed in a more serious situation in the future. Hasty use of the SPR could well dissuade friendly producing countries from stepping up their own output because petroleum from the SPR is going to flow into the market. Putting SPR oil into the market might temporarily send prices down, but then they might bounce right back, raising the question of whether to drain yet more oil from the reserves. Finally, the whole history of price controls does not provide much confidence about how deft government can be at using strategic stocks as a tool of market management.
OPEC AND THE IEA: THE BALANCING ACT
OPEC represents key oil-exporting countries; the IEA was founded to represent importing countries.
Sources: OPEC; IEA
Decisions about the use of strategic reserves will always require judgment, an evaluation of a wide variety of factors, including the level of commercial inventories, and consultation among consumers and with key producing nations. Ambiguity about its use can help to temper a “sky’s the limit” psychology. But the essential point was made by Lawrence Summers, when he was treasury secretary in the Clinton administration, during a White House debate about using the reserves: “The SPR was created to respond to supply disruptions,” and not as a means “simply to respond to high prices or a tight market.” These stockpiles are an antidote to panic, a source of confidence, and a deterrent to actions that might otherwise interrupt supplies.7
The Quest: Energy, Security, and the Remaking of the Modern World Page 31
