News Release Details
The challenge of energy security
New Delhi 22-Aug-2007
<b>Energy independence is a pipedream, but interdependence can be made to work.</b> For three decades, the rich world has talked about curbing its addiction to imported oil. But, despite the anxious rhetoric, the oil-supply problem has become worse and energy security more complex. Notwithstanding politicians1 repeated calls for energy independence, over the past 30 years, the US has doubled its dependence on imported oil, which now accounts for nearly two-thirds of its oil needs. Threats to cut oil supplies in order to change a country's foreign policy have a long history. Arab members of OPEC called for an embargo at the time of the 1967 war, but it had little effect because the US was then largely self-sufficient. But by the 1973 Yom Kippur war, the Arab oil embargo had a greater effect. The embargo drove up prices and unleashed a period of inflation and stagnation worldwide. It also demonstrated that oil is a fungible commodity. Even though the embargo was aimed at the US and the Netherlands, market forces shifted oil among consumers, and all consuming countries suffered the same price shock. Oil embargos turned out to be a blunt instrument. In the aftermath, energy security policy has had four components. By liberalizing energy prices, governments allowed markets to encourage conservation and new supply. Modest subsidies and regulations encouraged conservation and renewable energy sources. Some governments began to store oil in strategic petroleum reserves that could be used to for short periods in a crisis. Rich countries also helped to create the Paris-based International Energy Agency, which coordinates policies (including strategic reserves) among consumer countries. Such policies still make sense. They would probably not be adequate, however, to deal with a prolonged disruption of supplies. The world is not running out of oil, but two-thirds of oil reserves are located in the politically unstable Persian Gulf region. The US imports only a small portion of its oil from there. Its largest supplier is Canada. But a disruption of Gulf oil supplies would raise prices and damage all economies. Moreover, new dimensions of the problem have emerged in the last few years. One is the great increase in energy demand from the rapidly growing economies of Asia. China appears to believe that it can secure its energy imports by locking up oil contracts with pariah states like Sudan. However, while this short sighted mercantilist approach creates foreign policy problems over issues like Darfur, it will not really protect China from a supply disruption. It would be far better to bring China (and India) into the IEA. Another new dimension of the problem is the manner in which high prices and increased reserves have transferred power to energy producing countries. State-owned companies now control far more oil and gas reserves than do the traditional private energy companies. Many of these state-owned companies are using their pricing power for political purposes. Finally, the energy security problem has been complicated by the problem of global climate change. Rising sea levels, drought in Africa, and increasingly turbulent storms all pose a new type of threat, so measures to deal with energy security must address the demand side even more than the supply side. Transforming coal into liquids would increase secure supplies, but they imply more carbon dioxide emissions than imported oil does. Reducing demand through improved energy efficiency and conservation would be better. But it is not enough for the US and EU countries to improve their energy efficiency unless other countries do so as well. China and India can use their large coal resources, but unless they also have access to improved coal technology, the burdens they impose on the atmosphere will be large. This year, China will surpass the US in emissions of greenhouse gases. It builds nearly two new coal-fired electricity plants each week. In such a world, energy security can no longer be summed up as greater energy independence. Instead, we must find better ways to cope with energy interdependence.
New Delhi 22-Aug-2007
<b>Energy independence is a pipedream, but interdependence can be made to work.</b> For three decades, the rich world has talked about curbing its addiction to imported oil. But, despite the anxious rhetoric, the oil-supply problem has become worse and energy security more complex. Notwithstanding politicians1 repeated calls for energy independence, over the past 30 years, the US has doubled its dependence on imported oil, which now accounts for nearly two-thirds of its oil needs. Threats to cut oil supplies in order to change a country's foreign policy have a long history. Arab members of OPEC called for an embargo at the time of the 1967 war, but it had little effect because the US was then largely self-sufficient. But by the 1973 Yom Kippur war, the Arab oil embargo had a greater effect. The embargo drove up prices and unleashed a period of inflation and stagnation worldwide. It also demonstrated that oil is a fungible commodity. Even though the embargo was aimed at the US and the Netherlands, market forces shifted oil among consumers, and all consuming countries suffered the same price shock. Oil embargos turned out to be a blunt instrument. In the aftermath, energy security policy has had four components. By liberalizing energy prices, governments allowed markets to encourage conservation and new supply. Modest subsidies and regulations encouraged conservation and renewable energy sources. Some governments began to store oil in strategic petroleum reserves that could be used to for short periods in a crisis. Rich countries also helped to create the Paris-based International Energy Agency, which coordinates policies (including strategic reserves) among consumer countries. Such policies still make sense. They would probably not be adequate, however, to deal with a prolonged disruption of supplies. The world is not running out of oil, but two-thirds of oil reserves are located in the politically unstable Persian Gulf region. The US imports only a small portion of its oil from there. Its largest supplier is Canada. But a disruption of Gulf oil supplies would raise prices and damage all economies. Moreover, new dimensions of the problem have emerged in the last few years. One is the great increase in energy demand from the rapidly growing economies of Asia. China appears to believe that it can secure its energy imports by locking up oil contracts with pariah states like Sudan. However, while this short sighted mercantilist approach creates foreign policy problems over issues like Darfur, it will not really protect China from a supply disruption. It would be far better to bring China (and India) into the IEA. Another new dimension of the problem is the manner in which high prices and increased reserves have transferred power to energy producing countries. State-owned companies now control far more oil and gas reserves than do the traditional private energy companies. Many of these state-owned companies are using their pricing power for political purposes. Finally, the energy security problem has been complicated by the problem of global climate change. Rising sea levels, drought in Africa, and increasingly turbulent storms all pose a new type of threat, so measures to deal with energy security must address the demand side even more than the supply side. Transforming coal into liquids would increase secure supplies, but they imply more carbon dioxide emissions than imported oil does. Reducing demand through improved energy efficiency and conservation would be better. But it is not enough for the US and EU countries to improve their energy efficiency unless other countries do so as well. China and India can use their large coal resources, but unless they also have access to improved coal technology, the burdens they impose on the atmosphere will be large. This year, China will surpass the US in emissions of greenhouse gases. It builds nearly two new coal-fired electricity plants each week. In such a world, energy security can no longer be summed up as greater energy independence. Instead, we must find better ways to cope with energy interdependence.