Societal Impact of Energy Security
in Western Nations
By
Robert E. Ebel
Chairman, Energy Program
Center for Strategic and International Studies
Washington, D. C.
Presented to the Advanced Research Workshop
"Baltic Energy Security and Independence,"
Vilnius, Lithuania, 21-23 June 2004
In today's context, national security and energy security are so closely
intertwined that it is inconceivable to consider them as separate issues. First,
what do we mean by national security? I would suggest that the best answer, at
least in my judgment, was provided a number of years ago by the eminent
American diplomat, George Kennan, who offered perhaps the least complicated
definition: "(national security means) the continued ability of this country to
pursue its internal life without serious interference."
What then is meant by energy security? For the American consumer, the answer
is simple. He has only two concerns: price and availability. Little else matters.
Whether the oil consumed is imported or not is of little importance. I would
suggest that these concerns hold true for most consumers everywhere.
Importing governments, however, must take a different view and seek energy
security—or security of supply through diversity of supply—as well diversity
among the kinds of fuels consumed.
The United States, for example, imports oil from some 60 different suppliers.
Yet that measure of diversity is misleading, for it masks the importance of the
Persian Gulf in particular and of the Organization of Petroleum Exporting
Countries (OPEC) in general. The search for new supplies of oil outside the
Persian Gulf continues, but a substitute has yet to be found. Yes, supplies from
Russia and from the Caspian Sea are increasingly important and add to the
diversity importers seek.
Nonetheless, the future of oil is defined not by current production levels but
rather by the measure of oil reserves, and that measure places the world oil
future in the hands of the Persian Gulf.
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Why are we so concerned about security of energy supply, but particularly of
oil? What is it about oil that captures our attention?
Very simply, the scent of oil is very intoxicating. It is intoxicating to the private
sector and to governments alike. For example, the potential of Caspian and
Central Asian oil and natural gas has caught the attention of a broad array of
nations and of entrepreneurs, for reasons that mix politics and economics. It is,
in sum, the power of oil.
Just what is that power? I would describe it this way.
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Oil is high profile stuff, for it fuels more than automobiles and airplanes.
Oil fuels military power, national treasuries, and international politics. Because
of this it is no longer a commodity to be bought and sold within the confines of
traditional energy supply and demand balances. Rather, it has been
transformed into a determinant of well-being, of national security, and
international power for those who possess this vital resource, and the converse
for those who do not.
About 60 percent of the oil available to the United States originates from
countries whose national interests may not always coincide with ours.
Does that mean our national security is more in jeopardy today than it was in the
past, simply because of our higher dependence on imported oil? The easy
answer of course would be "yes." Such high dependence on the foreign supply
of any commodity as essential to our way of life as oil clearly is unacceptable.
If we accept Kennan's definition, then oil imports do threaten national security,
for any major disruption, for whatever the reason, raises the prospect of serious
interference in the ability of a country to pursue its internal life. And the greater
the dependence, the greater the prospect of interference.
I can say, however, for the United States at least, a country so dependent on
foreign oil and anticipating a growing dependence on natural gas, that the
general public does not view the reliance on foreign energy with any particular
alarm. Rather, it is the politicians that continue to stress the value of energy
independence, whether that independence is ever achievable or not.
Our political leaders often speak of the need to seek energy independence. But,
is U.S. energy independence nothing more than a political fantasy? Reason tells
us that energy independence will most probably never be within our grasp.
Any oil or gas-importing nation, whether the United States or Japan, or now
China, has limited choices when it comes to energy security. We import because
our requirements exceed what we can produce domestically. We seek energy
security—to protect ourselves against disruptions in deliveries from foreign
suppliers—through diversity of supply and through our Strategic Petroleum
Reserve.
The European Union is far more dependent on energy imports than any country
or grouping of countries. Yet, it has not set out to define policies that would
reduce this dependence. Understanding that imported energy will play an
increasingly important role in energy supplies, the EU is working instead to find
means to manage the risks associated with such dependence.
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II
Oil is truly a global commodity, and that means we are vulnerable to any event,
any time, anywhere, that impacts on supply or demand. Thus, vulnerability is
ever-present, regardless of the level of import dependency. And it is global
dependence on Persian Gulf oil that is important, and not U.S. dependence.
There is a distinction to be made between vulnerability and security. It is not
import levels but how much we consume that is of concern. In that context, it is
price that makes us vulnerable. It is consumption times price that expresses our
vulnerability. Domestic crude oil prices and world market prices will essentially
be in line, unless the domestic market is protected in some fashion.
True vulnerability may be found in the prices paid for imported oil and
moreover in the volatility of these prices. Will an importing economy be strong
enough to absorb the impact of such volatility?
III
The message I have for you is a simple one, but one that carries tremendous
financial and geopolitical implications. The message is this:
It is perhaps ironic that in an age where the pace of technological change is
almost overwhelming, the world will remain dependent, for this decade and next
at least, on essentially the same forms of energy—oil, coal, and natural gas—
that fueled the 20th century.
But as the coming years play out, major shifts are afoot. The importance of
these shifts may not be readily apparent to the Baltic states. But you do not
stand in energy isolation, and you must be continually aware of developments
around you.
By the year 2020, or perhaps sooner, energy consumption by the Developing
World may equal or surpass that of the Industrialized World. What forms of
energy will these countries be consuming—cheap, dirty coals or clean natural
gas, for example—and where will the supplies come from? Will this shift lead
to competition—both economic and political—for access to supplies? Might
nuclear electric power be given a larger role in electricity generation? Can these
countries pay for the energy and supporting infrastructure, such as power
generating plants, or will the Industrialized World have to help out with funds,
and with technology transfers? If not, the divide between North and South
becomes wider.
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The coming years will see important shifts among the kinds of fuel consumed.
The International Energy Agency projects that over time the relative share of oil
will decline, as will the shares of coal and nuclear. Natural gas is the only form
of primary energy to gain both in relative and absolute terms, clearly reflecting
its reputation as a clean-burning fuel, especially in power generation. The
relative share of renewables holds its own, disappointing perhaps to
environmentalists, but nonetheless a victory of sorts.
What happens to all the energy consumed worldwide? A surprising 38% is
burned to generate electricity. And 18% goes to fuel transportation, as does
more than half the oil consumed.
We can define a number of oil trends, each a story in itself.
• European dependence on Gulf oil will remain significant
• Asian dependence on Gulf oil will expand dramatically
• US oil imports will continue to grow.
And natural gas trends as well.
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Natural gas is the fastest growing primary energy source
Its use is to double, worldwide, by 2020
But this growth requires major infrastructure investments
The U.S. will become more reliant on imported natural gas
Russia, today providing 26% of the natural gas that Europe consumes,
has its eye on expanding that share.
Coal does not enjoy the high visibility of oil and natural gas. Nonetheless,
surprising to some, the United States leads the world in coal reserves, but China
is the leader in terms of coal production and consumption.
More than 55% of the coal consumed worldwide is for electricity generation,
and in the United States, an even higher share—around 92%. Electricity
generation will be the basis for future growth in coal use, worldwide.
The nuclear future unfortunately is not all that promising. Nuclear power
presently accounts for 16% of worldwide electricity generation. But by the year
2020 that contribution is expected to decline to just 10%.
The potential for renewable forms of energy is almost unlimited, but realization
of that potential is constrained by costs and by technological limitations. The
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attraction of conventional forms of energy will be difficult to overcome, and
scattered niche markets will likely remain the near-term future for renewables.
Electricity is the most rapidly growing form of energy use during the years up to
2020 at least. This growth will be concentrated in the developing countries,
where electricity use will more than double. Why so? People are coming to
demand a consumer lifestyle requiring cheap and readily available electricity as
an entitlement. Yet the burning of fuels to generate electricity is a very
inefficient process, in that 3 Btus of fuel yield only 1 Btu of electric power.
IV
Incoming governments often set out to develop a new energy policy for the
country, as the existing policy has not been able to satisfactorily resolve
continuing questions related to energy supply and demand. Unfortunately,
many, if not most, of these policies end up on the bookshelf, gathering dust.
What does it take to be able to develop an energy policy?
I would suggest that understanding tradeoffs is key to a successful energy
policy for any country. Indeed, every energy decision we make as a nation or
as individuals has a tradeoff and these tradeoffs carry their own risks and costs.
Just what is meant by a tradeoff? Let me offer the following.
Nuclear electric power reactors provide the United States with 20 % of our
electricity needs. But, surprisingly to many, roughly 50 percent of the fuel
burned in U.S. nuclear power reactors originates with Russia.
Doesn't that put the United States in a particularly vulnerable position?
Is there a tradeoff to justify this vulnerability? There is.
• The Russian fuel for our nuclear reactors comes from the conversion
of nuclear warhead material.
• To date, this conversion has eliminated the equivalent of more than
7,000 Russian nuclear warheads.
• This is an acceptable tradeoff, in terms of U.S. national security
interests.
And this tradeoff works because Russia also views it to be in their national
interests.
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V
The United States holds the world's largest supply of emergency crude oil,
stored in huge underground salt caverns along the Gulf of Mexico. Although the
stockpiling of emergency crude oil had long been recommended, it was not until
the 1973-74 Arab oil embargo that the need became so obvious. The cutoff of
Arab oil exports to the United States in effect provided our government with the
needed political will to establish a strategic petroleum reserve.
Today this reserve holds more than 660 million barrels, against a capacity of
700 million barrels, sufficient to offset the loss of all oil imports for about 60
days. The maximum drawdown capability is 4.3 million barrels per day, roughly
equivalent to one-third of oil volumes imported today. Some $21 billion has
been invested to date in the facilities and in the stored oil.
There are specific rules relating to any withdrawal from the reserve, but in
general the decision to withdraw would be taken to counter a severe energy
supply interruption and its consequences, but not to be used specifically to
influence prices. The first-ever withdrawal came in January 2001 following the
Iraqi invasion of Kuwait. The second, and only other withdrawal, came as the
result of a Presidentially-ordered drawdown.
I would note that whenever oil prices are high, as they are today, political
pressure mounts to withdraw oil from the reserve, with the thought that such
additions to supply would help depress prices. President Bush however has
made it clear that withdrawals would be made only in the event of a severe
supply disruption.
The United States is not alone in establishing a petroleum reserve. All 26
member-countries of the International Energy Agency, under the OECD, are to
hold oil stocks amounting to a least 90 days of net imports, and to share these
stocks should there be a severe disruption in world oil supply. Oil exporting
members of the IEA, like Norway, are exempt. Most of the IEA stocks are held
by industry.
VI
Just 10 years ago, in 1993, China was a net exporter of oil. Today, because
of stagnant domestic oil production and rapidly expanding demand, China
has become a net oil importer of considerable scale, with imports now
providing about one-third of total supply. More importantly, the country's
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reliance on imports is projected to expand to 60% by 2010 and further to
82% by the year 2030.
This rapidly expanding import dependency has translated into a growing
concern relative to security of supply and the need to establish strategic oil
stocks. Four storage sites have been identified. A system of government stocks,
supplemented by compulsory industry stocks, has been proposed. National
stocks were regarded as a last resort. It is hoped that by 2010, government and
industry stocks combined would equal 50 days of domestic consumption.
China, as with any oil importing country, must be ready to respond to any
supply contingency. But the creation of strategic stockpiles takes time and
money and is a decision not to be taken lightly. The question arises, would it be
more prudent financially to wait until oil prices have declined to purchase oil for
their strategic reserve? Yes, it would, but what would happen in the interim
should oil imports be disrupted? Would China be forced to go to the oil market,
prepared to buy oil at any price because the country had no other choice?
The IEA can call upon a number of emergency response measures—stockdraw,
demand restraint, fuel-switching, surge oil production, and sharing of available
supplies—to any oil disruption that reduces supply by 7%, the "trigger" agreed
upon. Moreover, in a disruption, IEA member-countries act in concert, as a
coordinated response would be far more successful in reducing the threat than if
member-countries acted solely on their own.
Demand restraint measures are particularly valuable, and should be spelled out
in advance of any oil market disruption, that is, those steps, both voluntary and
mandatory, that would be required of consumers to ensure the best possible use
was being made of energy supplies that were available.
Lessons For the Baltic States
Are there lessons to be learned by the Baltic states by reflecting upon the
experience of other countries who have addressed those vulnerabilities
associated with a dependence on energy supplies originating outside their
borders?
Of course there are. The key lessons would appear to be:
• For political and economic reasons, avoid over-reliance on a particular
supplier. Supply diversification is the approach taken by importing
countries to help provide the needed security of supply.
• Diversification among kinds of fuels consumed is equally important
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Coordination, not competition
Strategic oil stockpiles are essential
Demand restraint measures are equally essential
Consider protective measures now, not after the fact.
In sum, accepting energy import dependency and recognizing the risks and costs
of those tradeoffs that accompany this dependency define the most appropriate
course of action: that is, to secure the means to manage these associated risks
and costs, especially the geopolitical risks that accompany over-reliance on one
country.
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