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19th World Energy Congress, Sydney, Australia 5 – 9 September 2004
Markets, Geopolitics, Energy Security and Sustainability
George Anderson
Deputy Minister, Natural Resources Canada
Keynote Address Session 3: Markets, Geopolitics and Energy Security
It is both an honour and a daunting challenge to address such an
expert audience on the vast subject of markets, geopolitics and energy security.
Even so, I propose to expand the subject further still and add the concept which
has been at the centre of so much of this Congress’s deliberation—that of
sustainability. While markets, geopolitics and energy security are going to
remain critical issues in shaping our energy future, more and more they will be
joined by the question of sustainability.
Speaking on this subject requires modesty because of the uncertainties,
the complexities and the range. I shall not, in twenty minutes, try to emulate the
physicists in coming up with a unified theory of everything. Rather I shall try to
put forward some observations and questions that might help us as we think
about energy in the twenty-first century and how the future may differ from the
past.
Geopolitics
Imagine we were meeting a little over thirty years ago, say in September
of 1973. We would be on the eve of the greatest geopolitical upheaval in the
modern history of energy—the two oil shocks and everything that flowed from
them. How many would see such shocks coming? Or be able to predict the path
oil prices back to much lower levels? Who would foresee the North Sea boom or
the surge in production in the Gulf of Mexico? Or the tremendous progress in
offshore technology, horizontal drilling and seismic techniques, or in bringing
down costs in the oil sands and LNG? And how many crystal balls would foretell
the larger shifts in the geopolitical shape of the world—the collapse of the Soviet
Empire, and the emergence of an extraordinarily robust market economy in
China and increasingly in India as well—with all the attendant implications for
energy supply and demand?
We have lived through an extraordinary three decades of turmoil and
surprises in the global energy business. However, as we look back on those
three decades, it is striking how much it was geopolitics that shaped the main
energy story.
The oil shocks were a geopolitical phenomenon. Of course they were
made possible by the market power of certain producers and it was market
responses that eventually brought oil prices back into line—so markets
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mattered—, but it was geopolitical factors that drove both shocks, not normal
functioning of markets. The high prices they brought drove the development of
many new technologies—not just in oil extraction, but in alternative energies and
energy use as well—as well as the exploitation of high cost oil provinces, notably
in some offshore areas.
Similarly, the end of the Soviet Empire and the huge changes China were
geopolitical in nature, first and foremost. But they have played out with major
consequences for global energy supply and demand.
Will major geopolitical factors—major ruptures or seismic shifts in the
geopolitical nature of international relations—play a similarly important role in
driving the energy story in the coming thirty years? I ask this question when
terrorism is at centre stage, when a war is still unfinished in Iraq, when an Arab-
Israeli peace settlement seems further than ever and when relations between the
Muslim world and the West are exceptionally strained.
It would be rash indeed to predict no geopolitical surprises. Surprises can
be positive—as we have seen with the end of communism—but they can be
nasty as well. I don’t propose to speculate on different geopolitical scenarios, but
I do want to make a few observations.
All indications are that there will be significantly increased market
dependency on OPEC, and more specifically on the Gulf states, for oil. Thus
more than ever, the Gulf area is going to be the geopolitical cockpit of the global
oil system. There are widely different scenarios that are quite conceivable for the
Gulf region—from some sort of success in stabilizing Iraq and the region more
generally to other, much bleaker, prospects.
Russia and the former Soviet states are also likely to become more
significant suppliers of oil (and gas for that matter) and there are clearly
geopolitical issues in this region which could affect how these possibilities play
out. I will differ to Mr. Chubais on this subject.
On the demand side, the fast growing Chinese and Indian economies—to
name only the largest—are going to have increasing economic and political
weight in the world and are also going to be amongst the largest purchasers of oil
from the Gulf. They also have higher oil dependency than the OECD economies,
so they are more sensitive to oil price movements. So we can expect China and
India to become significant new actors in the geopolitics around oil.
While it is true that international trade in gas will increase dramatically, it
appears unlikely to have the same significance in geopolitical relations as oil.
The gas market is not fully globalized in the same way oil is and importers
typically have more diverse or perhaps more politically stable sources of supply
than is the case with oil. While some speculate on the eventual emergence of a
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“Gaspec”, most discount the likelihood. Similarly, coal trade will grow, but it will
not be of major strategic significance.
Even without any major geopolitical surprises, it can be assumed that
major oil importers will become increasingly concerned about their degree of
dependence on Gulf oil. Should there ever be a nasty surprise with major
consequences for oil markets—a serious supply disruption or a major price
spike—that could be a tipping point in terms of both geopolitical strategies and
policy responses relating to oil security.
Markets
Let me turn now to markets. Energy markets in the twentieth century were
not, for the most part, fully free markets. There were all kinds of interventions: to
protect producers or consumers; to stabilize prices; to limit or promote demand
for a particular commodity; to protect long-term security. These interventions
reflected both considered philosophies and sheer politics. The politics of energy
played out quite differently depending on the size of the local coal, oil or gas
producing interests, as well as the history of consumer protections or subsidies.
Throughout the twentieth century there was a tension between market
forces and oil producer interests. When oil is abundant, markets tend to drive the
price down and favour production in the lowest cost areas. Much of the history of
the oil business has been the play between these market forces and various
producer inspired measures to counter them—devices such as prorationing, oil
import duties to protect local producers, and international cartelization. The
argument in favour of some such management of these markets is usually that
stability in prices, or certain minimum prices, can be beneficial, and that may be
true. But vested interests always risk pushing for too much. And how do the
short term and longer-term rationales square? For example, US policies to
promote its domestic industry meant its oil was exploited earliest and at relatively
low prices. OPEC’s very high prices after the oil shocks set the stage for a
subsequent dramatic fall in price and market share for OPEC.
The point is that it is not realistic to expect pure market forces to shape
energy economies around the world. That said, there is clearly more respect for
market mechanisms than there was fifteen or twenty years ago—this is
outstandingly true of the transitional and developing economies. And the OECD
countries, in particular, have become much more rigorous in designing their
energy policies to be market compatible. This is true even when they consider
interventions in the energy market—increasingly the instruments used, such as
emissions trading, are designed to take advantage of market forces.
The major current issues around the role of markets deal largely with
investment conditions—especially for electricity and for oil.
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The International Energy Agency has done valuable work reviewing the
long-term investment needs of the energy sector globally. The Agency is
concerned with whether all least some developing countries will be able to
mobilize the capital for their huge investment needs in electricity. Some face
political challenges to correct badly distorted markets, where electricity producers
may receive a fraction of the cost of their service and consumers are subsidized.
The IEA is also concerned that OECD countries may not have got their market
design right for liberalized electricity markets. What both these sets of issues
have in common is the need to meet market tests for private investors. If private
capital is needed, private investors will have to be satisfied.
There are also concerns around investment in the oil sector, notably
whether the investment conditions will be in place for the Middle East to
contribute two-thirds of the growth in global oil production from now until 2030.
While Middle Eastern needs are not that large relatively—because costs are so
much lower than in other areas, notably Canada’s oil sands—they are
strategically very important. If those countries discourage investment—generally
or by restricting access of foreign investors—, then this could feed back to bring
higher oil prices, less global economic growth and, significantly, lower revenues
for the OPEC countries. Of course, these questions are closely tied to what
OPEC’s strategy might be—or what different members would like it to be. But
the issue goes beyond that because within the large oil exporting countries there
are significant domestic political considerations around the role of foreign capital
and the rate of investment of domestic capital in oil development.
Energy Security
This brings me to the issue of energy security. Energy security was a
major issue after the two oil shocks but then gradually diminished with plentiful
supply and lower prices. Concern about energy security is now rising again.
This year it was a focus of discussions amongst western hemisphere and APEC
energy ministers and at the International Energy Forum in Amsterdam. High
prices have brought political and public focus to vulnerabilities in oil markets,
including how exogenous developments—such as those in Iraq, Venezuela and
Nigeria—can have major impacts.
Energy security can mean many things. After last August’s massive
blackout, we in North America are very conscious that reliable electric systems
are part of energy security. As well, the threat of terrorism has brought focus on
the need to protect energy infrastructure.
But the major issue of energy security has always been focussed on oil—
on potential vulnerability to interrupions of oil supply or major oil price
manipulation. This is because oil dominates international energy trade in value
terms and because international trade is such an important part of the oil
business. In 2000, 45% of global oil supply was supplied from outside the region
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in which it was consumed; by 2030 that could rise to almost 60%. Oil is the most
political commodity. It is only oil which has known deliberate supply interruptions
and managed price escalation.
Both the current focus on the Middle East and high oil prices have made
oil security a major issue in the current US presidential election. Longer-term
North America is headed towards getting the majority of its oil from imports. This
is not necessarily alarming—both Europe and Japan already have much higher
oil import dependencies—but it is a fair question how increased oil dependencies
will play out in the strategic thinking of the unique superpower. At this stage,
candidates Bush and Kerry are proposing quite different responses.
The OECD economies are becoming progressively less oil intensive, so
that at one level their vulnerability to oil insecurity is decreasing. Against this, all
the OECD oil producers except Canada face declining production, real rises in oil
demand and an increased demand for foreign oil. As I mentioned earlier, a very
interesting shift in the broader geopolitics of oil security will be how China, India
and other fast developing countries may play. While all of these countries are
becoming less energy intensive, they are at the stage in their development where
they are becoming more oil intensive and more dependent on oil imports. So
these countries are potentially the most vulnerable to oil insecurities and that,
plus their increasing weight in international relations, could have major
implications for the shape of international oil politics in the coming years.
On balance, my view is that energy security is likely to become a more
important focus of energy policy—both in the OECD and in the rapidly developing
countries—than it has been in recent years.
Sustainability
This brings me to the overriding theme of this conference—sustainability.
Sustainability has two major dimensions: sustainability of supply and
sustainability of use.
Until quite recently, sustainability as it related to energy policy was
primarily about sustainability of supply. In this sense, it was a particular aspect of
energy security. There was some focus on this at the time of the Club of Rome
in the early 1960s, but the dire predictions of resource shortages never
materialized and the concern was widely discredited. However, timing is
everything and a new, quite vigorous debate is emerging around the issue of
global oil production “peaking”. The world consumed some 718 billion barrels of
oil from 1850 until 2002. It is on track to consume a like amount in about twenty
more years. And then a like amount again in less than the twenty years after
that. The drama of all this is that most geologists hold that the world’s total
recoverable oil resources are somewhere between 2 and 3 trillion barrels. As
well, some believe production follows a bell curve and starts to decline once half
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the ultimately recoverable resource is exhausted. It appears certain the oil age
will end this century: the question is when production will peak and start to
decline.
The debate over oil peaking is very polemical, with opponents often
treating one another as fools and knaves. I enter this territory with great caution.
The uncertainties are clearly great. A study by the US Energy Information
Administration found that oil production might peak between 2030 and 2075—a
huge range, with the earlier number having major strategic implications. Leading
pessimists see the peak come much sooner. A neutral observer, Bob Williams,
Executive Editor of the Oil and Gas Journal, has concluded that the peak oil
debate is no longer a mere academic exercise and that it could have major
impacts on public decisions. He sees an urgent need to address the data and
methodological issues around potential global oil production, and I must say I
would welcome that.
It may be that constraints on investment, notably in the Gulf states, will
prove more important than a looming resource shortage in the next decade or
two. In any case, the scale of the production challenge is so large that thinking
about potential constraints should probably have a bigger part in our scenarios
than it has in the past. It could have important implications for oil prices,
geopolitics and strategic thinking about energy options.
However, the current focus of the sustainability debate, as we have heard
in this conference, is on sustainable energy use, not production. In most of the
last thirty years, this focussed on localized issues of clean air and water,
including acid rain. As well, concerns about energy security and high prices
motivated various off-oil or energy efficiency drives, which were also sold on the
basis of their green virtues. Though there are still significant challenges in
dealing with clean air and water in the most advanced countries, progress has
been dramatic and I think it fair to say that the particular challenges around clean
and water air do not, in and of themselves, have profound implications for the
nature of our energy economies: we know the solutions and they are, by and
large, compatible with current use patterns, if at some cost.
Of course, the situation is different and more acute in the developing and
transitional economies. They face huge challenges regarding clean air and
water, made more urgent by the fast growth of their fossil fuel consumption. But
again, one could envisage, over time, their following the lead of the highly
developed countries in cleaning up and managing these impacts largely within
the framework of existing patterns of production and consumption.
Climate change is another matter. A sustainable level of carbon
emissions into the atmosphere will require the most profound transformation of
our energy economies—perhaps eventually to have greenhouse gas emissions
at one tenth current levels, relative to economic output.
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Climate change, as has been much discussed here, goes to the heart of
our use of fossil fuels. It came onto the radar screen of energy policies in a
serious way in the 1990s, but concrete measures were still very marginal.
Canada is a signatory to the Kyoto protocol and has undertaken a series of
significant long and short-term initiatives to address climate change, but we
realize how long and difficult the road will be and that it must be part of a
collective effort internationally.
I do not propose to enter into possible measures and strategies, but I
would like to make a few observations about how climate change might link to
geopolitics, markets, and energy security. It is clearly the most contentious issue
of energy policy, stimulating strong clashes of views and interests.
One such clash is particularly acute within the advanced economies.
There sometimes appears to be a dialogue of the deaf between, if I can borrow
from a recent book, the hard headed thinkers from Mars and the soft minded
dreamers from Venus. The Martians are focused on the tough issues of
competitiveness, energy supply and security, and geopolitics. The Venetians are
preoccupied with the longer-term environmental sustainability of energy systems
and the need for fundamental transformations.
A second clash around climate change is between economies at different
stages of development. This is the well known debate around burden-sharing in
addressing the issue. It overlaps with the first debate in that the Martians tend to
be particularly tough-minded on burden-sharing, while the Venetians tend to
believe that the most advanced economies should move first as an act of
leadership and equity.
I am not so naïve as to believe that these differences will be resolved
easily or soon. But the rising concerns about oil security and longer-term prices
may provide some common ground for all sides to decide we need to address
the rate of growth in oil consumption. There are measures that could have
significant impact, for example by promoting some of the promising technologies
coming available in the transportation sector.
There is also a broad consensus around the importance of research,
development, and technology transfer. The global commitment to energy R&D,
both public and private, has dropped significantly and is a fraction of what it
should be given the challenges we face. I believe we shall need to pay a good
deal more attention to cooperative international energy R&D strategies in all their
dimensions, including technology transfer to developing countries. Canada’s
government is proposing that 5% of our R&D programs should be done in
partnership with developing countries.
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Certainly, R&D will have to be part of finding a solution to the challenge of
coal. Coal is prospectively at least as important a source of CO2 emissions as is
oil. But there is little concern about security of supply or even longer-term prices;
in fact, coal becomes even more attractive economically as oil and gas prices
rise. While fast developing countries may move to clean up local coal emissions,
doing so only lowers CO2 emissions through higher efficiencies. Longer-term a
fruitful strategy on coal is going to rely on different forces and actions. A focus
on technical issues is clearly needed and Canada welcomes the international
cooperation on both CO2 sequestration—I shall be representing Canada at the
ministerial meeting on this in Melbourne next week—and on other clean coal
technologies.
Some Conclusions
In conclusion, we are clearly entering a very different period for global
energy relations. We shall continue to face geopolitical risks and uncertainties
and concerns around energy security are likely to continue to rise. Oil will remain
the most strategic and political energy commodity. But there shall be more and
more focus on sustainability and potential constraints on our current energy
paths—especially because of climate change, but possibly because of
investment and even resource constraints. It will be interesting to see how these
old and new issues might relate to one another. The roles of leading actors in
the global debate will also change as the centre of gravity for oil production shifts
back towards the Middle East, while Asia assumes a much larger role in energy
consumption. One thing is certain: it is going to be interesting and challenging. I
wish I were a younger man.