Energy Geopolitics in 2017
A U.S. Posture Emerging from Vulnerability
GREAT DECISIONS
FEBRUARY 28, 2017
STEPHEN V. ARBOGAST, DIRECTOR
KENAN-FLAGLER ENERGY CENTER
Discussion Topics
Energy Geopolitics – What are the Issues?
Where are We Today?
What Dynamics will Shape these Issues Going Forward?
The Position of the United States Today
The Geopolitical Environmental Agenda & Climate Change
Where to Go From Here – Action Plans
Energy Geopolitics
Definition & Issues
Energy Geopolitics: The policies and interaction of nation states focused on
their development, sale & acquisition of essential Energy supplies.
◦ Focused on behavior of nation states
◦ Concerned with vital role of energy in national economic life & security
This becomes clearer when we list the issues:
◦
◦
◦
◦
◦
Physical shortage, due to supply interruption or boycott
Political blackmail, under the threat of interrupted supply
Price spikes, due to tight market conditions or supply curtailment
Economic development, fostering wealth creation & jobs
Environmental consequences, including Climate change
For decades, economic development was THE issue; after 1973 OPEC
revolution, 1st three emerged, followed shortly by environment/climate
Today’s Questions
How should we understand the relative importance of these
varied issues now and their interconnectedness?
What kind of Geopolitical policy agenda emerges for the U.S.
from this understanding?
Where are We Today?
Threat of Physical shortage has receded, though not gone
Political intimidation a threat in Europe; longer term a threat for Asia
Price spikes a recent experience, but hope for moderation going forward
Economic development agenda has major issues, including conflict with
environmental/climate policies and Natural Resource curse
Options for addressing these issues the best in Decades
Some History Required to Make Sense of these Outlooks
How did We Get Here?
◦ The Key is ‘Spare Capacity’ in the Global Oil Supply
◦ Prior to 1970, the U.S. provided spare capacity, and oil boycotts failed
◦ Starting 1970, U.S. spare capacity disappeared, setting stage for October
1973 OPEC boycott and price spike
◦ Also set the stage for nationalization & politicization of oil supply from Persian Gulf, Venezuela
◦ Creating an energy price world driven by oil prices, looking like this:
Oil Price Cycles – A History
Source: Prof. Chris Ross
PG Oil supply disruptions
Leading to These Rules of Thumb:
◦ When global oil supply spare capacity becomes:
1.
All concentrated in the Persian Gulf, and
2.
Falls to 2 MBD or less
Persian Gulf producers acquire acute pricing power and boycott potential
◦ This includes Iran and Iraq
◦ Even if U.S. supply not physically curtailed, its economy is hostage via price
◦ The U.S. has both global responsibility and a supreme national interest in
protecting security of supply from Persian Gulf
◦ This means protecting stability of Saudi Arabia
◦ Hence wars in 1991, 2001-TODAY!
How We Got to $145/B Oil in 2008
Saudi Spare Capacity & Oil Prices: 2000 - 2007
12,000
$80.00
$70.00
10,000
$60.00
In Thousand Barrels per Day
8,000
$50.00
6,000
$40.00
$30.00
4,000
$20.00
2,000
$10.00
0
2000
2001
Production
2002
Spare Capacity
2003
Total Capacity
2004
2005
Price
$0.00
2006
2007
U.S. Foreign Policy has Quietly been
Hostage to Saudi Arabia
◦ Despite periodic Saudi economic aggression vs. U.S. interests and quiet
support of terrorism, U.S. has steadfastly supported House of Saud
◦ Fear as much fragility of Kingdom as what Saudis might do intentionally
◦ The Nightmares: civil war/insurrection destroys oil fields and/or
◦ Kingdom falls to Radical or Shia Islam
◦ U.S. responses: (so far, enough w/Saud adroitness)
◦ Military alliance, proven in response to Iraqi invasion, U.S. Fleet in PG
◦ Constant arms sales and training of Saudi defense forces
◦ ‘Look the other Way’ on House of Saud ‘deal’ with Wahhabi radicals
◦ ‘Two State’ solution and financial support for Palestinians
Summarizing U.S. Foreign Policy and
Energy Vulnerability: The Status Quo
◦ Still exposed to physical supply disruption/boycott, though less so
◦ Hostage via alliances to Europe/Japan on supply security
◦ Economically exposed to supply curtailments global price effects
◦ Committed to security of Persian Gulf supply routes, stability of Saudi
Kingdom due to U.S. exposures & inability/unwillingness of others to act
◦ Europe, Japan, China, India have greater exposure but act as ‘Free Riders’
And, One More Thing
Supply Side Despair
◦ OPEC’s power rested on reality that high prices don’t unleash new supply
◦ Price hikes are immediate but has taken 5-7 years for new supplies to come forth
◦ Why: Arctic, Offshore, Tar Sands all take time, huge capital to unlock
◦ A sense of this despair, vulnerability was captured in 1979 Exxon Annual Report
◦ The balance between world energy demand and available supplies will be precarious. The
risk of periodic shortfalls in supplies is likely to be greater than the prospect for surpluses
since the governments of oil exporting countries may not supply all of the oil which industrial
countries want, even at ever higher prices…
◦ the nation needs to accept the fact that…a world securely based on a flow of energy from
renewable sources still remains a distant prospect…the nation must aggressively develop the
indigenous sources that can be available in the meantime…
◦ Unless this happens, succeeding generations face the prospect of a real decline in economic
well-being and a further loss of independence in international affairs for which they can
rightly hold our generation responsible.”
This has been the ‘Energy Shadow’ over U.S. Foreign Policy for 4 decades
But, it May be Changing!
EIA’s Outlook: OECD Continues to Live With this Vulnerability –
Will that Mean Status Quo re: M.E. & Saudi policy? Let’s See
Global Petroleum Consumption/Production: EIA’17 Outlook
MB/D
2016
2020
2040
U.S.
Rest: OECD
Other
19.6
26.7
48.8
20.1
26.4
54.2
19.3
27.2
74.5
Total
95.1
100.8
121.0
U.S.
Russia
Other
OPEC
14.6
10.7
32.4
37.3
17.0
10.6
33.9
39.2
17.5
12.2
39.9
51.4
Total*
95.0
100.7
121.0
Consumption
Production
NOTES: U.S. Consumption vs. Production & ‘Call on OPEC’
* Consumption/Production may not balance due to inventory effects & rounding
The Good News: New Supply Side Dynamics
are reshaping this World
◦ Hydraulic Fracking has unlocked vast new oil & gas resources @ <$100/b
◦ New Natural Gas especially important strategically
◦ LNG is creating global gas market and options to move on from coal/oil
◦ Wind & Solar costs have come down to where they can displace much coal
inside power generation & help make EVs feasible clean transportation
How much will these Help?
Let’s Examine Today’s Energy Vulnerabilities
Who’s Vulnerable Today…and into the Future?
◦ Supply Interruption/Physical Boycott:
◦ China & India are huge importers of PG oil…China @ ~ 9 MB/D and Growing!
◦ Europe & Japan remain dependent on PG for oil imports, Russia for oil & natural gas
◦ Fracking supply moving U.S. towards balanced, only imports from Canada/Mexico
◦ Price vulnerability remains global, key U.S. exposure
◦ However, fracking, LNG & renewables change price dynamics for better
How much Difference have they Made?
Let’s measure the vulnerabilities & Supply Side progress
Oil Import Vulnerability
Source: EIA 2017 Annual Energy Outlook
Net Importers Exposure: MB/D
2016
2025
2040
CHINA cons. – prod.
6.9
8.4
10.2
EUROPE
10.4
10.3
11.3
JAPAN
3.9
3.5
3.2
INDIA
4.0
5.0
8.0*
United States
5.3
2.4
2.2
‘Call’ on M.E. OPEC
27.8
30.8
39.0
Natural Gas from Russia
Europe’s Other Vulnerability
Individual European Countries
Vulnerability to Russian Gas Supply
So, How Much Difference do Fracking, LNG &
Renewables Make? Let’s See for the U.S.
Net Oil Importers Exposure: MB/D
2016
2025
2040
5.3
2.4
2.2
Canada
2.9
3.0
3.5
Mexico
0.8
0.7
0.8
Net N. America Imports
1.5
(1.3)
(2.1)
United States
N.A. Net Exporters: MB/D
What is Unconventional Development’s
Contribution Here?
MB/D U.S. Oil & NGLs
YEAR
2016
2025
2040
TOTAL U.S.
12.3
15.2
15.1
‘TIGHT OIL’
4.6
6.2
6.3
NGLs
3.1
4.3
4.2
% Total
63
69
70
Source: EIA 2017 AEO
What About Natural Gas & Renewables?
Self-sufficiency, LNG Exports, Lower Carbon E
TCF U.S. DRY GAS
YEAR
2016
2025
2040
TOTAL U.S.
26.5
36.1
37.7
‘TIGHT GAS’
4.7
4.8
5.8
SHALE PLAYS
14.1
20.8
25.3
% Total
71
71
82
Net Gas Exports QBTU
(1.0)
4.7
5.8
Renewables BKWH
559
938
1139
% Total
14
23
26
Source: EIA 2017 AEO
These Developments Significantly change
the Position of the U.S. Going Forward
◦ North American oil self-sufficiency can be a reality – no need for imports
from OPEC ME or even Africa
◦ North America a significant LNG exporter, with upside potential
◦ Reserve supply source for Europe and/or Asia – with Alberta a ‘Reserve Gas Bank’
◦ Options to expand LNG/CNG-based transportation
◦ U.S. has best set of low-carbon, renewable options in either high carbon tax
or disruptive technology world
◦ Best wind/solar resources, grid, + nuclear & hydro
◦ Leading EV industry
Interestingly, this Changes the U.S.
Bargaining Position with Allies & Rivals
◦ Over next 2 decades, vulnerability of Europe, Japan, China/India increases
while that of U.S. should decrease
◦ THE BIG CHANGE – North American oil self-sufficiency gives U.S. the option
to seal itself off from OPEC supply disruptions, INCLUDING PRICE!
◦ In supply curtailment, U.S. prohibits exports outside of North America
◦ Canadian supply channeled into U.S. via pipelines
◦ USG buys Mexican production for redistribution, at world price if necessary
◦ Temporary U.S. price controls until disruption normalizes, with Mexican premium ‘socialized’ via
small emergency excise tax
◦ Opening up the question, should U.S. still carry sole burden of PG security?
Injecting More Fluidity into U.S.
Foreign Policy on Energy, Middle East
◦ Opportunity for Cooperative approach on burden sharing in PG
◦ Initially, NATO + Japan based
◦ Eventual opportunity for China to join
◦ Backed by U.S. willingness to share ‘pain’ in supply curtailment
◦ Europe/Japan join regional military alliance with Saudis vs. ISIS
◦ Intent re: Iran determined via observance of nuclear accord terms
◦ THE LEVERAGE – Alternative is U.S. ‘go it alone’ in N. America option
◦ Prepared: Contingency plans for administering
Realizing this Potential involves Frac’ing
so Getting Environmental Practices Right is Key
◦ U.S. Frac’ing growth is ‘Baked In’ to EIA’s Outlook – contributing 70% of oil
production by 2025 and +12 TCF of Natural Gas
◦ Allowing 6 QBTUs of LNG exports to Europe & Asia
◦ Such growth can only be accomplished with Acceptable Environmental
practices that sustain Political & Community support
◦ After 7+ years of practice, the issues & solutions are established:
1.
2.
3.
Recycle water in dry areas and earthquake prone zones
Lock down fugitive methane emissions – no venting, tighten pipeline operations
Funding proper well abandonment & area restoration
◦ These measures are not that costly, and can be accommodated @ $70/b oil
Realizing this Potential – 5 Rules & Policies for
Harvesting Benefits of Stronger U.S. Position
◦ It shall be a U.S. Foreign Policy objective to maintain > 3 MB/D of spare capacity
among the Persian Gulf oil producing states
◦ Adopt Regulatory frameworks/enforcement to assure frac’ing & associated
infrastructure are environmentally safe but otherwise not disrupted
◦ It shall also be U.S. Foreign policy to do the following:
◦ Continue integration of North American energy production via interconnecting pipelines
◦ Encourage LNG exports to allied nations currently dependent on Russian or ME Gas
◦ Promote a ‘Burden Sharing’ approach to PG security issues, tied to continued
emergency supply sharing understandings
◦ Adopt a Carbon Tax that enables nuclear power to survive/grow alongside cheap
natural gas w/o ‘reenergizing’ coal in power generation
The Potential Outcome, and How it Could
Be Different from Recent Decades
◦ The Potential Outcome for U.S. and Allies:
◦ Moderate, Stable Oil Prices – because OPEC always has significant spare capacity
◦ Supply disruption minimized by OPEC spare, broad alliance guarding PG, consumer supply
sharing arrangements, and frac’ing’s ability to ‘surge capacity’
◦ Russia’s threat to Europe diminished by absence of higher oil revenues, Europe’s access to LNG
◦ Saudi Arabia bolstered vs. external threats while incentivized to continue modernization under
moderate, stable oil prices
◦ Continued transition to lower carbon economies via Natural Gas, LNG, Renewables
◦ Differences from Past:
◦ U.S. no longer exposed to global oil price spikes
◦ U.S. no long hostage to Allies’ supply vulnerability
◦ U.S. no longer sole bearer of security responsibilities in PG
IT COULD BE SO
QUESTIONS?