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Energy Security: A Foreign Policy Trump Card?




By Jan H Kalicki

While oil has always been a political commodity, it is clearly even more so when oil and gas prices reach record levels and when international energy markets – suffering from slim excess capacity – jump at threats of renewed attacks in the Niger Delta, rumors of military attacks on Iran, or even failed attempts to sabotage the world's largest oil processing facility in Saudi Arabia. These events – and we can be sure there will be more like them – introduce extraordinary volatility into the international energy system. They increase the desire – here in the US and globally – for energy security, that is to say reliable, affordable supplies of energy for future growth and well-being.

The title of my remarks today is “Energy Security: A Foreign Policy Trump Card?” The question mark after the title is deliberate – and if I were to answer this question today the answer would have to be “yes – but it's a card held by others.” I will explain why and then explain how the answer could become “yes – and it’s a card held by all of us,” based on a new book called Energy and Security: Toward a New Foreign Policy Strategy, which former Assistant Secretary of Energy David Goldwyn and I have co-edited with contributions from 35 of the leading energy, environment and foreign policy experts from the US and seven other countries. As I do so, I will start from the perspective of the debate here in the US and then conclude with the perspective of the international debate.

The Situation Today

In the US, the debate was certainly not helped by fancies, renewed by the State of the Union and its aftermath, that we can cut back sharply dependence on oil and gas, and specifically Middle East supplies, in the near term. The first point to understand is that energy interdependence is a fact of life. The US imports more than half its energy from other countries today, and we can expect to import two-thirds by 2025. Americans depend on OPEC producers for over one-third of our energy, and the world depends on OPEC for over half.

In fact, it should be recognized that for the past quarter century, important Middle Eastern countries have provided a reliable supply of oil and gas to global markets. Saudi Arabia has steadily provided over 9mn b/d of oil; it is maintaining 1.5mn barrels of excess capacity; and it is moving to increase that supply to 12mn b/d. For its part, Qatar is a major gas supplier to the world – exporting over 27mn tons/year and expected to export over 77mn t/y by the end of the decade. The company I work for is proud to invest in and with Saudi Arabia and Qatar – which we see as pillars of energy security now and in the future.

Politicians in America rarely speak about these essential facts. Rather, most still like to call for “energy independence,” but I’m sorry to say that's pure snakeoil. The last year the US was independent of energy imports was 1949. The issue today is whether we can reduce our energy dependence, but I get ahead of my story. The problem is compounded by the fact that world energy demand is growing – propelled by the US as the No 1 consumer, China as the No 2 consumer, as well as India, Brazil and other fast growing developing countries. The world consumes about twice as much oil as we discover – and crises have hit such key producers as Nigeria and Venezuela.

There is growing stress between supply and demand – in refined products even more than in crude oil or natural gas – and it’s pushing our gas and fuel prices higher and higher. When energy historian Dan Yergin and we discussed our book in Washington, he remarked that people who thought energy security was about the Arabian/Persian Gulf were in for a rude shock when Hurricane Katrina came along: it turns out that energy security is also about another Gulf – the Gulf of Mexico – and about our vulnerability to a whole range of threats, both natural and man-made.

Katrina brought home that for all the talk about homeland security and emergency response, government agencies responded too little too late to a disaster for which we received advance warning – in previous weeks as well as months. What happens when the next big hurricane hits – or, God forbid, if there’s another 9-11 type disaster for which we have little or no warning, say attacks on our ports, our refineries, our nuclear and chemical facilities, or our key transportation links? Homeland and physical security have to be still right up there at the top of our agenda.

How about other man-made threats to energy security? War in Iraq, strikes in Venezuela, and strife in Nigeria and Chad have already led the international oil markets to build in a so-called “risk premium” upwards of $10/B. What happens if we add to that? Let’s say the 2mn b/d removed by Hurricane Katrina were removed by an Iran feeling cornered over its nuclear weapons program, or by a Venezuelan president believing – however wrongly – that he’s about to be taken out? It would not be hard to visualize oil prices skyrocketing to the $80s/B, $90s/B or even over $100/B in short order.

So the prevailing trend today is energy security. The foreign policy tramp card is not in our hands – it’s in the hands of others including those who cast about for ways to neutralize superior US military power. In an environment of scarce capacity, it's a card that could be played if we push hard on the security objectives that are important to us, from nuclear non-proliferation to regional stability. Let’s now discuss how we might regain that card for ourselves.

What Government Offers Us

One place some optimists might look is the energy bill passed by Congress just last August, but I’m sorry to say it does virtually nothing to increase our energy security. Moreover, for every $2 for oil, gas and coal production, it offers at most $1 for energy efficiency and renewable energy. In fact, the energy industry doesn't need subsidies and incentives – it needs a moratorium on more regulatory incentives to future investment.

It also speaks volumes that just one week after passing the $14.5bn energy bill, Congress passed a new $286bn transportation bill – 20 times as much – which will actually help to increase the use of cars and trucks versus mass transit.

A Pathway to Energy Security

The authors in our book recognize there is no simple magic wand, but they do present a set of solutions which will work to greatly increase energy security. A technology mobilization can make a big difference in making the transition to a non-carbon-based future. Increased production from current and future fields and greater conservation and efficiency, such as the use of fuel-efficient and hybrid vehicles can make an even more immediate contribution. Increasing fuel efficiency by even a few miles per gallon will reduce our national consumption by billions of barrels a year.

The second step is to move against the fuel and gas shortfalls which are a clear and present danger to our economy. We need to cut the regulatory red tape which has prevented a single new refinery from being built in almost three decades – and which imposes literally dozens of separate state standards for gas at the pump. We need to streamline procedures for regasifying the LNG which comes to our shores – and can supply abundant, clean energy as we effect a longer-term energy transition.

The third step is to increase our insurance against drops in supply. The US has a Strategic Petroleum Reserve (SPR) which used to give us cover for 90 days of imports. It’s now down to 60 days, and should be brought back up to 90 as and when prices recede – suggesting 1bn barrel US reserve, with greater dispersal for physical security, instead of our current 700mn barrels. And we must adopt clear and transparent rules for using the SPR – whereby the Secretary of Energy must make a recommendation and the President a decision within a time certain of the onset of a crisis.

The same should go for our other partners in the International Energy Agency (IEA), who came to our aid with both crude and refined products in the aftermath of Katrina. More fundamentally, though, we need to enlarge the IEA to include China and India, the world’s two fastest growing consuming countries, and to work with them to create SPRs of their own. The longer-term objective should be a global strategic petroleum reserve – with preferences for those states which embrace the same rules for energy trade and investment.

From Defense To Offense

The fourth step is to move from defense to offense – in the positive sense of this word – in energy security. We must make common cause with other energy consumers, in the IEA and elsewhere. We must also support the development of non-OPEC producers, such as Russia and the Caspian states, but also new oil and gas provinces in Canada and Australia. And now is the time for the IEA to engage all producers, OPEC and non-OPEC, in creating a new consumer-producer covenant assuring future trade and investment access and future supplies at stable and equitable price levels. The newly created International Energy Forum would be one promising venue for pursuing this.

The fifth step is to move internationally to ensure transparency and the use of energy resources for future development and growth. In too many countries, oil has been a curse which abetted corruption, poverty and repression. We must support promising new initiatives – for example the Extractive Industries Transparency Initiative (EITI) championed by British Prime Minister Tony Blair – which tracks funds from energy contracts and helps ensure they are used for the growth and stability of the producing countries. In short, energy consumers and producers can and should work together with the World Bank and other international institutions to help “dry the swamp” in which conflict and terrorism develop.

Perhaps most fundamentally, we must integrate the energy and foreign policy tracks of our national security. For too long these have been separate, and the energy and foreign policy worlds have hardly spoken to each other. But if we make energy security a top foreign policy priority, we can work for a world in which the interests of energy consumers and producers are increasingly aligned rather than torn apart. At the same time, energy initiatives can significantly advance our foreign policy interests. Let's take three topical examples before I close: Russia, Korea and Iran.

The paramount foreign policy issue with Russia is whether its ties with the US and the West will increase, or whether it will seek other preferred partners – for example China – or turn inward, in a nationalist and statist reaction, within parts of its former empire. Energy offers Russia, Europe and the US an opportunity for bridge-building and engagement. Russia could export much more oil and refined products to the American and European markets. Russia could also export much more gas – for example in liquefied form from the giant Shtokman field which Gazprom plans to develop with European and American partners. This will require billions of dollars of cross-investment in Russia, Europe and the US – in fields, refineries, pipelines, LNG and re-gas terminals – bringing these countries together more powerfully than any number of diplomatic initiatives.

In Korea, six countries – China, Japan, Russia, the US, and South and North Korea – may still be able to achieve an agreement to exclude nuclear weapons from the peninsula. The big stumbling block may be the North’s insistence on a light water nuclear reactor it was supposed to receive under the previous, unsuccessful 1994 agreement. Some form of heavily monitored reactor, with its spent fuel removed from Korea, may prove to be necessary. But the size and the risk could be lessened significantly if we can introduce a new gas fueled power plant, supplied from Siberia or the Russian Far East and financed by China, South Korea and Japan who are seeking just this gas supply from giant Russian fields in Sakhalin and Kovykta. Over time, this plant could replace the interim power supplies currently offered by South Korea. A gas and electric power initiative could be a catalytic, even transformative event for the two Koreas and their neighbors.

Or take finally Iran, whose new president says he’s determined to resist outside pressures and acquire the full nuclear fuel cycle essential to building nuclear weapons. This has just become tougher with Iran’s acknowledgment that it’s pursuing the more advanced P-2 enrichment process – bringing oil prices of record highs over $70/B. Even if the Russians and Chinese finally agree to UN sanctions, they’re likely to limit them as much as possible, with the result that the Iranian program proceeds and military options become more likely.

I’m of the view that even as we must pursue the coercive options, we should leave no stone unturned on diplomacy as well. For example, could we replace the current downward cycle with a new regional energy initiative which includes Iran? The elements could be support, rather than opposition, of Iranian gas supplies to South Asia and Caspian oil swaps with Iran, as well as stringent safeguards over the Russian supplied nuclear reactor - again removing its spent fuel from the country - in return for Iranian agreement to suspend enrichment activities and to cooperate on Caspian and Middle East issues.

If we’re capable of contemplating a grand bargain with one part of the so-called axis of evil, North Korea, why not with another part, Iran? If we can contemplate recognition, non-aggression guarantees and economic assistance for Pyongyang, why can’t we contemplate a political and energy initiative with Tehran? Instead of treating diplomacy as some sort of seal of approval – and very few approve of the truculent statements coming from Iran's new president – we should treat it as a way to promote vigorously our interests with countries that disagree or are even hostile to us. It’s interesting that President Bush’s first deputy secretary of state, Richard Armitage, called recently for direct US-Iranian talks. Whether they are direct or go through third parties, energy can be at least a catalyst if not a transformative element of the overall equation.

Foreign Policy Trump Card

On energy today, we have a choice. After riding through the present crisis, the US and other key energy states can go back to the lack of a serious energy security policy which characterized the quarter century since the crises of the 1970s. Or we can respond to the wake-up calls of recent months. If we do wake up, these six steps, I believe, will go far to recreating energy security for the US, our allies and partners: a package of production, conservation, efficiency and technology; a global strategic petroleum reserve; increased non-OPEC production and consumer-producer cooperation; transparency and governance initiatives; and most fundamentally full integration of energy and foreign policy.

If we take these steps, we can move from increased energy dependence to increased energy security and interdependence. We can move from the prospect of increased disruptions, natural and man-made, to a robust and diversified network for meeting our energy needs. We can move from an energy insecurity trump card held by others, who do not share our interests and values, to an energy security tramp card held by us, our allies and our partners in furtherance of our shared interests and values.

A wise Washington observer, former deputy secretary of defense John Hamre, observed recently that too many crises are coming to our front burner at the same time: Korea, Iran, Venezuela, Iraq and Nigeria to name just a few. But as is often the case, with crisis comes opportunity to create something better, and the authors in our book are convinced it’s US and international leadership for a more energy secure future.

Jan H Kalicki is Counselor for International Strategy, at Chevron Corporation. Petroleumworld not necessarily share these views.

Editor's Note: The preceding article was presented to the 33rd Annual Energy Conference of the International Research Center for Energy and Economic Development (ICEED) at Boulder, Colorado, on 24 April 2006 and first publish by Middle East Economic Survey - MEES, VOL. XLIX, No 35, 28-Aug-2006, Issue. Petroleumworld reprint this article in the interest of our readers.

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Petroleumworld 09/03/06

Copyright ©2006 Jan H Kalicki. All Rights Reserved.

 

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