Fri, Aug 17, 2007 - Page 9 News List

The changing face of energy security

The world is not yet running out of oil, but tow-thirds of oil reserves are located in the poitically unstable Persian Gulf region

By Joseph Nye

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 politicians' repeated calls for energy independence, over the past 30 years the US, for example, 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, particularly where the Middle East is concerned. Arab members of OPEC called for an embargo at the time of the 1967 Six-Day 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, owing to growing US demand for imported oil. 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. In the long term, all consuming countries suffered shortages of supply and the same price shock. Oil embargos turned out to be a blunt instrument that hurt many besides the targeted countries.

In the aftermath of the oil price shocks, energy security policy has had four components. By liberalizing energy prices, governments allowed markets to encourage conservation and new supply. In addition, governments introduced modest subsidies and regulations to encourage 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 (IEA), 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 the Persian Gulf. Its largest supplier is Canada. But the lesson of 1973 is that a disruption of Gulf oil supplies would raise prices and damage both rich and poor economies, regardless of how secure their own sources of supply might be.

Moreover, new dimensions of the problem of energy security have emerged in the last few years. One is the great increase in energy demand from the rapidly growing economies of Asia, particularly China.

China appears to believe that it can secure its energy imports by locking up oil contracts with pariah states like Sudan. However, while this mercantilist approach creates foreign policy problems over issues like Darfur, it will not protect China in a time of supply disruption. It would be far better to bring China (and India) into the IEA, and encourage normal Chinese participation in world markets.

Another new dimension of the energy 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 once known as the seven sisters. Many of these state-owned companies in countries like Russia and Venezuela are not responding merely to market forces, but are using their newfound pricing power for political purposes.

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