# Presentation: 727875

## Energy Security as a Driver in the Transition from Oil

- --W.L. Kohl, Johns Hopkins SAIS

## Energy Security:  Traditional  View

- For U.S. and developed countries:  reliable energy supplies at affordable prices (and environmentally sound) – U.S. Energy Plan, 2001
- Energy security is broader than oil, includes natural gas and electricity, but here we concentrate on oil
- Oil security is international, relates to stability of the world oil market which is one great pool

## Issues:

- OPEC Market Power:  by regulating production, the cartel has been able most of the time to maintain prices well above production costs
- Oil Price Shocks: are harmful to the economy
- --caused by instability in producer countries or wars
- --produce inflation, unemployment, recessions
- --depend on total oil consumption, also oil imports, and oil intensity of the economy
- Long-term outlook for oil supply, oil peaking

## Slide 4

## Strategies:

- Pursue diversity of supplies
- Strategic oil reserves (SPR)
- Participation in IEA oil crisis management (coordinated release of emergency stocks—1991, 2005)
- Information sharing and other activities of IEA to promote market stability and development of alternative energies

## Energy Security RevisedMarket Issues:

- Recent surging oil demand in China, India, U.S. has reduced spare capacity and raised oil prices to $70/bl. along with increased political risk
- Continuing instability in key producer countries (Venezuela, Nigeria, Iraq, Iran, Russia)
- Oil infrastructure now more vulnerable to terrorist attacks, hurricanes—needs to be protected
- Refining sector—inadequate investment, shortage of facilities to process lower grades of crude

## 		Other issues (cont.)				

- As oil demand grows, the amount of oil in interregional trade will increase by 2/3 according to IEA by 2030
- This will increase vulnerability to disruptions—especially in several narrow straits through which much oil must pass

## Middle East Oil Exports Thru “Dire Straits”

- IEA World Energy Outlook 2005

## Other Issues (cont.):

- Unsustainable energy use:  As pointed out by IEA, current energy use patterns are leading to rising CO2 emissions.  This is unsustainable!
-  Oil use (primarily in transport) contributes about 1/3 to CO2 emissions and climate change.
- Need to develop more sustainable fuels and transportation technologies to reduce CO2

## Slide 10

## Other Issues (cont.):

- Prospect of peaking of non-OPEC oil by 2020 (PFC Energy, ExxonMobil) will mean increased requirement for OPEC oil and unconventional oil.
- This will increase OPEC’s market share and leverage in the market as non-OPEC oil declines

## ExxonMobil Energy Outlook 2006

## Other Issues:  Oil Reduces  Foreign Policy Leverage

- Higher oil prices and increased oil wealth feed corruption and slow democratic reforms in producer governments. They can also support terrorism. This is contrary to the objective of promoting democracy in the Middle East.
- The U.S. and other importers are helping to finance regimes that may support terrorism
- Military costs of defending access to M.E. oil are heavy additional costs to the U.S.

## Conclusion for U.S.

- --U.S. energy security policy has been too narrowly focused on the market
- --Oil consumption needs to be reduced to improve environmental sustainability, protect against economic damage of oil shocks, increase foreign policy flexibility
- --Reduction in oil imports should follow.
- --Is this broader view taking hold?

## President George W. Bush --State of the Union, 2006

- “America is addicted to oil, which is often imported from unstable parts of the world.  The best way to break this addiction is through technology.”
- “We will increase our research in...
-     --better batteries for hybrid and electric cars, hydrogen vehicles
-     --produce cellulosic ethanol, make it competitive within six years.

## President Bush (cont.)

- “...another great goal:  to replace more than 75 percent of our oil imports from the Middle East by 2025.  By applying the talent and technology of America, this country can dramatically improve our environment, move beyond a petroleum-based economy, and make our dependence on Middle Eastern oil a thing of the past.”

## Comment:

- Energy security is becoming a U.S. driver for transition
- Overemphasis on supply side and technology.  How long for R and D to replace 200 million plus vehicles?  Decades?
- What about actions to reduce demand?  Gasoline tax?  Strengthen CAFÉ standards?
- Do we want to alienate the Saudis who hold key to spare capacity in world oil market during the transition?

## Slide 18

## Senator Richard Lugar Brookings Institution, 3/13/06

- “...energy is the albatross of U.S. national security.”
- “The basic dilemma for U.S. energy policy is how can our government speed up the transition to alternative renewable energy sources...Our long-term security and prosperity require sufficient, affordable, clean, reliable, and sustainable energy”
- “...A fleet of hybrid, and future plug-in hybrids, that run on E85, could reduce our oil use by 10 million b/d.”

## International:  Provisional Views

- EU and Japan view energy security and sustainability as more closely linked drivers
- Poor LDCs most concerned about oil prices and effect on balance of payments
- China and India focused on managing rising oil imports and new dependence on global market, though China has R&D program on alternatives
- Russia reinstating state control over strategic resources; major oil and gas exporter
- OPEC oil producers more concerned about demand security

## Japanese energy policy

- Seeks simultaneous achievement of:
- Energy security:  stable energy supply
- Economic efficiency via deregulation and liberalization to reduce supply costs
- Environmental protection:  especially reduction of CO2 to meet Kyoto Protocol targets

## Japan

- Reduced oil to 52 % of primary energy in 2000 from 78% in 1973 via fuel switching and efficiency; imports 90% of its oil from Middle East
- Continues to promote nuclear power, increase in natural gas, renewables, energy efficiency; hybrid vehicles, hydrogen and fuel cell vehicles

## New EU Greenpaper 2006seeks to balance:

- Sustainable energy use:  energy efficiency, renewables incl. alternative transport fuels
- Competitiveness: liberalize internal energy markets
- Security of supply:  reduce demand, use renewable and alternative energies, diversify sources, improve emergency stock management

## European Union

- In process of implementing Kyoto Protocol
- Has set targets of 21% share of electricity from renewable sources; 5.75% of all petrol and diesel should be biofuels—both by 2010
- Proposes setting minimum level of overall energy mix to come from secure and low-carbon sources
- Has established Emissions Trading Scheme to cover power plants

## China

- Surge in oil demand driven by increased vehicle ownership; oil fills gaps in power sector
- Imports about 40 percent of oil needs and growing, mainly from M.East, W.Africa
- Oil insecurity:  worried about availability, reliability (e.g. Malacca straits, foreign tankers), affordability
- Environmental impacts:  air pollution

## China (cont.)

- Responses:  focused on increasing domestic production and foreign equity oil, building more pipelines and an SPR
- Responses: promote natural gas, auto fuel efficiency standards
- R and D on coal liquefaction, hydrogen and fuel cells to replace oil (hydrogen vehicles at 2008 Beijing Olympics)