On the G20, US, and Energy Security

Energy Markets and the Crisis: Is the US Status as a Superpower at Risk? This article was originally published as part of a compilation Environmental Sustainability and the Financial Crisis: Linkages and Policy Recommendations — edited by Jennifer Clapp with the assistance of Linda Swanston.

Although energy markets and politics were not at the root of the financial/economic crisis, most would concur that the preceding increase in oil prices significantly contributed to the challenges most countries faced prior to the 2008 implosion of financial markets.

 Much was at play as prices climbed. Some maintain that speculators did not influence the oil price volatility; however, even the US Commodities Future Trading Commission — which last year insisted that the spike in oil prices was just supply and demand at work — now suggests that its data was deeply flawed and that speculators played a role in driving wild swings in oil prices. If there was a lesson learned in the early days of this turmoil, it was that global markets were interconnected at all levels, making the lines of cause and effect impossible to draw with precision.

 It was not long before the financial crisis turned into a global economic crisis. Energy markets were swept up in the tidal wave. By December, oil prices had collapsed to under US$34/barrel from the July 2008 peak of US$147/barrel. Since then, although prices have recovered (averaging approximately US$64/barrel in July 2009), the contraction of global demand combined with tight credit markets has taken the fizz out of the energy sector. Almost across the board, investment is down, from exploration to refining, from hydrocarbons to nuclear and alternative sources.

 Attempts to understand what is unfolding and to predict what is to come have commanded the attention of experts and institutions everywhere. Still, little of the analysis thus far has addressed the impact of the financial crisis on the geopolitics of energy markets. Aside from the direct effect of a low oil price on the revenues of oil-producing nations and their state oil companies that now control approximately 80 percent of the world’s oil resources, there are indirect effects that might prove more significant. In particular, the effects on global security and global energy markets of the extremely vulnerable US financial position are crucial. This position is a consequence of its deepening status as a debtor nation, combined with the magnitude of its stimulus package. These factors have accelerated US fragility and sent that country, and by extension the world, into uncharted territory.

 Energy Security for Oil Importing Nations

Previously, the predicament that oil-importing nations (particularly OECD countries) faced as prices rose was troublesome: declining terms of trade weakened their economies, which, among other impacts, sent inflationary pressures up and incomes down. On the other hand, the same high prices focused oil-importing nations’ attention on energy security. While talk of energy security has abated since late 2008, the issue still commands much attention from governments, especially of the world’s largest oil-importing nations.

For the US, the world’s biggest oil consumer — responsible for approximately 25 percent of global consumption — energy security equated to shifting and adding suppliers if possible, and providing incentives for developing alternative fuels domestically. As far as its interaction with Middle Eastern suppliers is concerned, it is hard to isolate the US energy strategy from the fight against terrorism, the war in Iraq and the Bush White House’s rhetoric of “us” against “them.” The only thread, mixed with all other messages, was a constant reminder that the US needed to make its “dependence on Middle Eastern oil a thing of the past.” In fact, US dependence on Middle Eastern oil is paltry. In the last few years, the US has imported approximately 58 percent of the crude oil and refined-petroleum products it consumed. Of these imports, the Middle East supplied 16 percent, with Saudi Arabia accounting for 11 percent.

 In contrast, the situation facing Japan, and increasingly China and India, is remarkably different. Although Japan’s energy efficiency pursuits have translated into a decrease in oil consumption, it is still the third-largest world consumer — after the US and China — and the second-largest net oil importer. It is hard to make sense of Japan’s energy security strategy. Unlike most other countries, its dependency on one region, the Middle East, has increased from 70 percent in the mid-1980s to approximately 90 percent in the last few years.

 This is a particularly vulnerable position for a country that imports almost all of its oil. China, on the other hand, is clearly acting strategically. Energy security is seen as a key issue for the country’s future development and its importance as an oil consumer and importer is rising dramatically. China went from self-sufficiency to importing 52 percent of its needs in recent years. Energy security has translated into hefty investments overseas in exploration and production, infrastructure projects, and equity participation in oil companies. Recent moves include substantial financing of exploration in Russia, Brazil and Ecuador in exchange for future supply guarantees. Although this strategy was already at play before the financial crisis, China used its hefty currency reserves to pursue its objectives aggressively in the first part of 2009. Its strategy is already paying off. Two years ago, over 50 percent of its imports came from the Middle East. While total Chinese consumption increased, dependence on that region decreased to 42 percent in 2008.

India’s dependency on foreign oil is also increasing substantially. Since 2007, it has become the world’s fifth-largest consumer. Oil exploration and production in India has not kept pace with demand. India imports almost 70 percent of its needs, with Saudi Arabia and Iran the primary suppliers. In fact, the Middle East accounts for 75 percent of total imports, or 53 percent of India’s total oil consumption. According to estimates from the US Energy Information Agency, India will become the fourth largest oil importer by 2025.

 A full picture of the impact of the financial/economic crisis on the geopolitics of energy will take time to emerge, as we wait for data on new import patterns. The numbers show that it is not US dependency on the Middle East that might prove to be troublesome. Japan, China and India have much more reason to worry. Yet, when it comes to US energy security, members of the country’s defence establishment — including, the Pentagon, analysts and security consultants — have made their careers on convincing the government and general public that total control over the Strait of Hormuz is essential. And that control can only be achieved with billions in military expenditures. Their rationale is that one-fifth of the world’s production must travel through that narrow corridor, and even if the US is not a direct recipient of that oil, any disruptions would send prices skyrocketing. While the logic behind keeping prices stable still holds, the idea that the US is the only country able to ensure this stability does not. Now, the reality is that the US is giving Japan, China and India a free ride. This is an untenable position. Although the discourse in Washington has not turned to the Strait of Hormuz and the corresponding defence budget, the US cannot afford to continue to carry the costs of protecting that corridor. Eventually, it will have to either charge other countries for its military service or scale back its involvement.

 If the might of the US has been diminishing in the last decade, the global financial/economic crisis has only served to accelerate this process. Whatever the US chooses to do, a profound change is inevitable in the way the country views itself and, equally importantly, in the way the world views the US. If recent decades highlighted the nation’s singular strength and its willingness to invest in the world’s stability, the decades to come will likely be marked by its ability to partner with others.

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3 Responses to On the G20, US, and Energy Security

  1. Ron Steenblik says:

    Good post, Annette. Would be interested in your thoughts on the recent decision at the G20 to tackle subsidies to fossil fuels:

    “29. Enhancing our energy efficiency can play an important, positive role in promoting energy security and fighting climate change. Inefficient fossil fuel subsidies encourage wasteful consumption, distort markets, impede investment in clean energy sources and undermine efforts to deal with climate change. The Organization for Economic Cooperation and Development (OECD) and the IEA have found that eliminating fossil fuel subsidies by 2020 would reduce global greenhouse gas emissions in 2050 by ten percent. Many countries are reducing fossil fuel subsidies while preventing adverse impact on the poorest. Building on these efforts and recognizing the challenges of populations suffering from energy poverty, we commit to:

    “Rationalize and phase out over the medium term inefficient fossil fuel subsidies that encourage wasteful consumption. As we do that, we recognize the importance of providing those in need with essential energy services, including through the use of targeted cash transfers and other appropriate mechanisms. This reform will not apply to our support for clean energy, renewables, and technologies that dramatically reduce greenhouse gas emissions. We will have our Energy and Finance Ministers, based on their national circumstances, develop implementation strategies and timeframes, and report back to Leaders at the next Summit. We ask the international financial institutions to offer support to countries in this process. We call on all nations to adopt policies that will phase out such subsidies worldwide.

    “30. We request relevant institutions, such as the IEA, OPEC, OECD, and World Bank, provide an analysis of the scope of energy subsidies and suggestions for the implementation of this initiative and report back at the next summit.”

    Seems to me that there needs to be some clarity as to coverage. Is the focus of this initiative only to be on subsidies directly targeted at consumption, in which case the majority are to be found in the non-OECD countries. Or will it also embrace subsidies that indirectly subsidize fossil-fuel consumption — such as tax breaks that make it more profitable for companies to offer employees free vehicles and fuel in lieu of higher salaries, or subsidies for airline connections to small and remote airports — which are common in the industrialized world. And what about subsidies to production provided through tax breaks and reduced royalty charges, which are also common?

    Institutionally, do the G20 really mean that they are going to ask EACH of the institutions named (the IEA, OPEC, OECD, and the World Bank) to provide an analysis of the scope of energy subsidies? If so, would they divide up the country coverage, or expect the institutions to meet and apportion the tasks? And what role for non-governmental organizations, some of which (like the Global Subsidies Initiative) are already doing work in this area?

  2. Annette Hester says:

    Ron, you raise a number of questions that should be asked. Like you, my first reaction was “who defines the breath of “subsidies” to be tackled?

    I am not sure if you are aware that CIGI09 — CIGI’s annual conference — will take place next weekend in Waterloo. We are going to discuss the impact of the financial and economic crisis on global governance. Alan Alexandroff and I are hosting the conference’s blog http://www.cigionline.org/publications/blogs/cigi09 and will make sure that the points you raise are discussed.

    Perhaps — as a community of scholars and stakeholders — we can offer some suggestions on how this process could be conducted as efficiently and equitably as possible.

  3. nice blog my car uses water fuel instead of normal fuel to drive here is a link to do the same: LINK

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