Energy and Global Security

by John V Mitchell

Lecture held at a seminar in the Academy on March 16, 2000.

John V Mitchell, born 1933, is an active researcher at The Royal Institute of International Affairs (Chatham House), where he leads the research programmes on energy and environment. he has been an employee of British Petroleum (BP), a.o. as Director of Planning and Special Adviser to the Executive Director concerning geopolitical and strategically economic matters.

The views expressed in this paper are the sole responsibility of the author.

This is a good time to have a serious discussion about energy and security. It seems topical. Oil prices have been above $30 a barrel for the first time in a decade. Meetings of OPEC ministers are mentioned on the front pages of the serious newspapers. The Russian army seems to have got control of most of Chechnya, on one of the the oil routes from the Caspian. There are rumblings in the background from the usual geologists who are predicting - not for the first time - that oil reserves cannot sustain future increases in production. What are we to make of it all?

First of all I think we should be prepared to disregard the old pictures and slogans which the media are getting out of their archives from the oil crisis of 1973. The most obvious points are that

In the past 27 years the world has not run out of oil,
Oil prices have never been sustained for long above their hundred year average - below $20 in today's dollars.

Secondly, the recent action by oil producers to restrain production was a response to the exceptionally low oil prices of 1998 which were near $10 per barrel. It was supported by the two major OECD oil exporters - Norway and Mexico. It did not originate in a conflict in the Middle East and it could not have achieved its results without the support of countries outside OPEC.

Finally, though the Russian army may have achieved something in Chechnya this time, the ability of Russia to project power and money beyond its shrunken borders is a world away - a third world away - from what it was in 1973.

What we need now is a cool look at today's realities, not a replay of the memories of oil warriors of the 1970s.

I believe there are four main points, which I will discuss in detail:

The differences between now and the 1970s in the world economy and political situation and within the oil sector;
The need to think about who security is for, who it is against, and what it is supposed to protect;
The need to find a better measure of security than "import dependence" which I believe is now an obstacle to clear thinking;
The extent to which a global option now exists for energy security.

Oil Now and in 1973

Diversification of Oil Supplies

Between 1965 and 1973, the first oil shock, the demand for oil world-wide was growing at 8 per annum. Oil supplied 46 per cent of world energy in 1973 and its share was growing rapidly. So was the OPEC share of oil supply, which reached over 50 per cent in 1973. Now, for the last ten years, oil demand has been growing at 1 per cent annually. The oil share of the energy market world-wide has shrunk - it was down to 42 per cent in 1998. The OPEC share of oil production, though it has risen since 1986, is still only just over 40 per cent and the share of the Middle East is just over 30 per cent compared to 53 per cent and 36 per cent in 1973. Energy supplies have been diversified by the development of natural gas and nuclear energy. Oil supplies have been diversified by discoveries and new developments in a wide variety of countries and continents

Structure of the World Oil Market

We are accustomed now to a global oil market in which prices are transparent and trade is free. Oil is traded like any other commodity. There are institutional spot and futures exchanges in London and New York for cruse oil and oil products. These prices determine the price of most imports and exports even if volumes are set by long term contracts. Most crude in international trade is traded between producers and traders or consumers who are independent of each other. Within the major importing regions there are no quotas or price controls. Russian producers compete to exports oil. Prices of oil on the domestic market are moving towards international levels in Russia and China, and some other developing countries. Natural gas has gone the same way in North America and is beginning to go the same way in Europe. The effect is a connected set of commodity markets where competition is the rule, economics work. Supplies move from where they are cheapest to where consumers are prepared to pay most for them. Investments follow the markets.

I will not go in detail through the industry soap opera of the period 1973 - 1983. This was when the transition to a competitive international market for oil took place.

In 1973, the situation was different on every point. Something like 90 per cent of international oil trade was conducted by a handful of companies - the "seven sisters" - who had almost exclusive rights to lift oil from what were then the main exporting countries. These companies also dominated the refining and marketing sectors of Europe and North America. Prices for crude oil in international trade were based on long-term tax reference prices which were set by agreements between the companies and the exporting governments. Prices of oil products in the main importing countries were under government control. Natural gas was also under price control in both the US and in Europe, where it was only just beginning to appear as a major source of energy. Coal was in many countries under the effective control of miners' unions, as we found out to our cost in Britain in 1973. We should always remember that in the UK the "three day week" and the power shortages which brought down the government of Mr Edward Heath in 1974 were caused by dependence on British coal, not by dependence on imported oil.

Economic Ideas and Management

The developments in the energy industry between 1973 and now took place in the context of wider economic changes which went in the same direction. Governments removed price controls across the OECD economies generally. Regulations were redesigned to promote competition, rather than control it, in most industries. Many Governments privatised producing assets and stepped out from the micro-management of the economy. Nor was this all. In North America and Europe the so-called Reagan-Thatcher years were also years in which many governments withdrew from Keynesian-type macro-economic policies. Fiscal discipline became the order of the day. For the members of the European Monetary Union this was entrenched by treaty into the conditions for participation in the single European currency. Non-OECD countries have gone the same way: Some of them, like Mexico and Korea, have joined the OECD. Others, like Argentina and now Brazil, have followed the new orthodoxy, supported, more or less, by the international financial institutions.

The effect of these macro economic changes has been, for many importing countries, to remove the framework within which it was possible to give a national "energy policy" the kind of meaning it had in the 1970s. Reading those old energy policy statements is like reading the medieval mystery plays: the language is archaic and the plots are always the same: a struggle between good guys and bas guys.

Governments now are promoting competition, not planning investments in energy. Budget deficits are bad politics, not good Keynesian theory. We need to look at energy security within the context of a global economy which not only is interdependent but where political and legal institutions either accommodate or reinforce that interdependence.

Similar trends are taking hold, out of necessity, in the oil exporting countries. Countries like Saudi Arabia had traditionally been the "low absorbers" of revenue, capable of withholding oil production and losing market share in order to support the price of oil. All are "high absorbers" now.

Sustainable Development

Moreover, economics is not all. The rise of the concept of sustainable development is well known here in Stockholm. It has been the theme of the 1990s in the same way as resources scarcity and security was the theme of the 1970s. I do not think the ideas of sustainable development will disappear so easily from the political scene.

This is a vast subject and I will mention only one feature which is most relevant to the question of energy security. The UN Framework Convention on Climate Change and the Kyoto protocol (if ratified) commit OECD countries, among others, to reduce and if possible reverse the growth in green-house gas emissions. To cut a long story short, it is clear that it will be impossible to reconcile these objectives of "sustainability" with the objectives of "development" without some combination of the following:

A technological shift to change in the connection between energy consumption and economic development;
A shift in the energy supply mix away from fossil fuels;
Within fossil fuel demand, a shift from the more carbon-intensive to the less carbon intensive, such as natural gas;
Extending these shifts to the developing countries. By 2010 developing countries will account for roughly half global CO₂ emissions and their share will grow as their energy demand continues to grow faster than that of the developed countries.

These are serious measures, and they do not necessarily all point in the same direction as the traditional policies of reducing oil imports: oil is emits less CO₂, for example, than coal and natural gas emits less than either.

Global Values

Another piece of "globalisation" which is more evident today than in 1973 is the promotion of basic human rights across frontiers. This is also a large topic. The concept of "basic human rights", as in the UN declaration of Human Rights, raises issues of the impact on of certain energy development projects on the human rights of people directly affected by the project. Multinational agencies, such as the World Bank, become involved in these issues. So do private sector companies who need more and more to be careful of their global reputations for corporate social responsibility.

Concepts of human rights lead naturally to questions of "good governance". These includes issues of corruption but also more generally of the rule of law and the impartial administration of justice, and the general competence of governments to carry out the policy in ways which are fair and efficient as between their citizens and the foreigners with whom they do business.

Questions of good governance lead naturally, but not unambiguously, to questions of democracy as a means to achieving legitimacy for the allocation of the costs and revenues which energy projects bring to the countries where they take place. Unpopular allocations can weaken governments and the stability of even democratic states.

The Geopolitical Context

While the global economic context for energy has changed since the 1970s, so has the global security environment. We may be looking for need a new energy chapter - or at least a footnote - in global security policy, but security policy itself is back with the editors. Other speakers will be addressing this with more knowledge and skill than I. It seems to me that there are three general security developments which are important in setting the energy dimension. These are the adjustments following the collapse of the Soviet Union, changes in the Middle East, and the rise of China within Asia and as part of the world geopolitical system. Each of these deserves a seminar in itself. I will just focus on some energy related aspects.

Post-Soviet Power

The first and most obvious geopolitical phenomenon of the 1990s was the collapse of the former Soviet Union. Much has followed from that. There is a difference between the Russian capacity and interest in continuing to project power within the borders of the former Soviet Union - the so-called "near abroad" and what it can or wants to do further afield. I will discuss one example in each category: the Caspian region and the Gulf.

How Important is Caspian Oil and Gas?

Much has been made by some journalists about the so-called "great game" and about oil as the centre of the Russian attention. I think this exaggerates the importance of Caspian oil. Production is currently about 3/4 of a million barrels per day, about 1 per cent of world production. Exports are perhaps a third of that. The most ambitious figures suggested by the US Energy Information Agency in 1998 [1] International Energy Outlook approached 7 mbd by 2020. Their latest estimates [2] are much more conservative, suggesting 2 million bd - just over 2 million bd by 2004 - 2005. In reality, the problem now is whether enough reserves will be proved in this time scale to support such production and therefore to justify building a major pipeline to export 1 million bd through Turkey - as the US government advocates. The fact is that optimistic guesses about oil resources in the Caspian have not been verified, and there has not been much drilling. Gas discoveries have been better, but not necessarily more rewarding. Gas exports from Azerbaijan need new pipelines. To revive gas exports from Turkmenistan through the existing Russian pipeline system needs new markets.

Russian experts have always expressed a poor opinion of the hydrocarbon potential of the Caspian [3] and it is unlikely that Russian policy towards these countries is driven by hopes of recapturing great oil wealth. There will be tariff revenue to be gained from these pipelines and this will be valuable to transit countries like Georgia. Pipeline fees are not a prize the Russian Federation should find worth fighting for.

I believe therefore that Russian interests in the region are both broader than oil and more simple. They have an interest at the minimum in preventing these newly independent countries from falling under the domination of any of their regional powers like Turkey or Iran, or becoming a new frontier for the so-called hegemony of the US. At the maximum Russian would seek to dominant influence over these countries' domestic as well as foreign policies. Rapid development of Caspian hydrocarbon resources, even though may be modest in global terms, is not in Russia's interest because even modest oil and pipeline revenues will strengthen the independence of these small countries and make them worth the sponsorship and patronage of the US and regional powers.

It seems to me as a practical matter that external military intervention in the Trans-Caucasian and Caspian countries is really an option for only one country - Russia. Non-military factors deployed by the US and other countries could make that a very costly option for Russia, but Russia also has many cards to play short of military action. The legal status of the Caspian sea is still unresolved in many regards: this uncertainty will increase the cost and reduce the availability of foreign investment, for example by banks and multilateral lending agencies. Russia can offer alternative export routes, often through existing pipelines or by relatively inexpensive expansions. These alternatives challenge the economics of the multiple routes canvassed by the US to avoid Russia. This I believe what "the game" in the Trans-Caucasus and central Asia is about. It is not about securing energy resources for either importing countries or for Russia: the prize is not worth the likely costs. It is about the degree of independence which the profits from developing oil and gas resources may bring these countries in the future. Energy is a means, not an end.

The puzzles for the strategists is whether the best that can be hoped for, in terms of independence for these countries, is a replica of the position in the Gulf before 1989, where US intervention was limited - as in the case of the flagging of Kuwait tankers - to very specific action responding to very specific local threats to the interests of the US and its allies. For the Caspian the analogy would be the protection of export pipelines within the independent states against threats which were generated for local reasons and not explicitly promoted by Russia.

One sad consequence of this scenario would be that the Caspian and Trans-Caucasus countries would have to maintain high defence budget, like the Gulf countries - to provide security against each other and minimise their dependence on an uncertain "balance of non-intervention" from outside. This may be good news from the point of view of encouraging those countries to support rapid expansion of oil and gas exports but it is not necessarily good news for the development of prosperous and stable democracies in the area.

The Gulf and the Soviets

Russia today has little capacity to threaten military intervention or offer serious military or economic support - except some technology and weapons sales - on any large scale outside the borders of the former Soviet Union. This is particularly important in the Gulf: in fact it was probably a precondition for the UN-labelled intervention by the US and its "allies" in 1990 and 1991.

Saddam Hussein's errant sense of timing lead him to attack Kuwait and threaten the US global interests just at the moment when the Soviet Union was collapsing. It is debatable, but I wonder whether US-led UN intervention in Kuwait would have occurred if the Soviet Union had still been in existence, and had had the capacity to confront, rather than accommodate, the US on the question of how to respond to the Iraqi aggression. The circumstances of 1990 were exceptionally favourable to the idea of intervention. Saddam Hussein appeared to threaten all Gulf countries: they had no alternative source of security. The apparent direct threat to oil supplies justified European and Japanese support. There was no direct Chinese interest. The diplomatic and military success of that intervention profoundly changed the security position in the Gulf from what had prevailed in the 1970s and 1980s. The US has come to be perceived as a dominant power in the region, capable of decisive military action in the area: a complete contrast to the dismal humiliation of the US during the Iranian hostage crisis.

Own Agendas in the Middle East

The second big external change relevant to energy and security is the situation in the Middle East itself. I believe it is still the case that the stability of relations between Gulf countries and within some Gulf countries cannot be taken for granted. On the positive side the position in Iran is quite different from what it was 20 years ago. We have seen the pluralist system of Government there continue to evolve: elections produce changes; checks and balances work. On the negative side, Saddam Hussein is still in power in Iraq. The nature of any successor regime is problematic. The capacity for peaceful change does not appear to have been institutionalised in other Gulf countries except by reliance on the flexibility of their monarchies.

Can we put these developments in a broader political context in looking at the future of energy supplies from the area? I think there are two elements:

The first is the existence of the peace process (not present in 1973) and its continuing momentum. The Arab oil embargo of 1973, short as it was, was a response to an Arab - Israeli war. Such a war would probably still the be only cause which could unite the Middle Eastern oil exporters to attempt to repeat an embargo. Today the cause is less likely. Moreover, the effect of such an embargo would be less damaging and less frightening to the oil importers than in 1973 because of the changes in the structure of the oil market which I described earlier.
The other aspect is less positive. These countries have the most rapid rates of population increase in the world, and their demands for revenue are growing even faster. The accumulated surpluses of the 1970s and early 1980s have been spent. Sadly much has been spent on armaments and war - first the Iran-Iraq war and then the Gulf war, which was essentially paid for out of the accumulated financial surpluses of the Gulf producers. [4] This history of war in the Middle East, and the countries' evident preference to maintain so-called defence expenditure, is vivid evidence that the oil exporters of the Middle east are not just commercial competitors in the oil market. They are geopolitical rivals. Their rivalry is based not on only economic interests and the struggle for power in the region but on differences between them of values and religion.

Stability in the Gulf might perhaps be imposed again from outside if it were upset from inside. But the experience of the Gulf war may be giving a misleading impression of the extent to which external military intervention can protect energy supplies in the future. A less generally offensive threat than Saddam may appear, so that international support may be difficult to achieve. Internal disruptions - as in Iran in 1979 - may not justify intervention. The possibility of overwhelming victory may be much more remote. The Kosovo model of intervention without ground warfare has set a new standard of intervention with minimum risk to foreign personnel which may have limited effectiveness.

The Significance of the Middle East in World Energy

The Middle East, unlike the Caspian, does have strategic significance for global energy supplies. What is this significance? I suggest there are three dimensions: quantities, prices, and control. The quantity measures are different depending whether we look at absolute numbers or at trade.

In absolute numbers, the Middle East supplies about 26 per cent of the world's liquid fuel supplies and about 10 per cent of the world's energy supplies. By 2020, using rather positive assumptions about growth in oil demand, these percentages could grow to about 36 per cent of oil supplies and about 13 per cent of world energy supplies. [5] Today the Middle East oil accounts for about 5 per cent of US energy consumption and about 10 per cent of European energy consumption. For 2020 the proportions will be roughly the same. They should not be regarded as life-threatening or as carrying intolerable economic risks.

For inter-regional oil trade, the Middle East is more important: it supplies about 40 per cent of inter-regional oil trade today and on the same projections would supply about 70 per cent of the world's inter-regional oil trade in 2020. However, there is a shift from West to East in the imports on Middle East oil. But the US and European share of inter-regional oil trade will fall from just over 60 per cent to just over 40 per cent, as the Pacific region takes a greater share of world oil and energy demand.

What is the significance of these figures for energy prices? In the context of a global economy, with free trade in oil, gas and coal there will be a tendency for the prices of energy commodities everywhere to relate to international prices, as in other commodity markets. In a structural, long term context, the important numbers are that the Middle East will supply 10 to 13 per cent of the world's energy supplies and the actions of Middle East oil producers are unlikely to affect the long term trend of energy prices. In the short term, things are different: oil prices are obviously affected by the levels of production of Middle East producers; also by the actions of other oil producers, the state of the economic cycle in importing countries, and the weather. For oil, as for other commodities, there can be no escape from fluctuations in price, but I doubt whether a few major exporting governments can push the long term price their way.

Insecure Exporters

I would like here to make the obverse point about the dependence of the oil exporters on their exports. Unlike the major oil producing countries - the US and Russia - the major Middle East producers are dependent on export markets for most of their foreign currency earnings, a high proportion of their government revenues, and through that for a large fraction of the national income. (The situation varies from country to country, and good figures are hard to come by. Middle East countries as a whole export over 70 per cent of their oil and gas production.)

Instability in the international oil markets creates real economic insecurity for the Middle East exporting countries. With real economic insecurity come real political insecurity: Can these government meet the steadily growing demand and of their rapidly growing populations? Can they match the efforts of the rival neighbours to achieve regional influence, or to promote competing religious outlooks, or different approaches towards secularism, towards the organisation of the state, towards foreign alliances and foreign investment? These countries are very different, not only in their geopolitical interests and domestic values, but in their oil potential. In simple terms, some have more barrels per head than others. [6]

This means that some countries, like Saudi Arabia can grow their revenues even under low prices by increasing production. Others, such as Iran and Abu Dhabi, do not have that physical capacity.

Every level of price implies a different level of demand. So long as the Middle East remains the residual or marginal supplier of oil and the main effects of volume changes will be reflected in the demand for Middle East oil. It is very difficult for the exporters to maintain constant shares of the market. Every different distribution of oil revenues therefore changes the distribution of power and influence. This is a permanent, structural feature of the export-dependent economies of the Gulf. This simple fact is what makes it so difficult for the Middle Eastern oil exporters to agree on output and pricing policies except under the most extreme conditions - such as $10/bbl oil prices in 1998. For global security, the two important things to understand are:

That the normal, long run position of Middle East oil in the world energy picture is quite modest (10 - 13 per cent of global energy supplies), and
The normal relationships between the Middle East oil exporters are dominated by both economic competition and political rivalry.

Russian Gas

There is a lesser, but similar issue for Russia as exporter of gas. Exports of Russian natural gas are an important generator of hard currency for the Russian Government. They are completely dependent on the continuing marketing of that gas in Western Europe, where it supplies just under 30 per cent of natural gas consumption and about 6 per cent of total energy consumption. Looking from the Russian end of the pipelines, this Western European export market accounts for about 25 per cent of Russian gas production. For Russia, these are pipeline exports for which there are no alternative markets in the short and medium term. [7] - For Western Europe, the developing gas grid with import terminals for Algeria gas and for LNG provide some short term, and larger long term alternatives. In the long run, Russia needs the European gas market and the European gas market does not need to pay extortionate prices for Russian gas.

Asia again

The third geopolitical development which has an energy impact is the growth of the Asia economies and their geopolitical importance. Among many complex developments two are especially important: the growth of China, helped by market economic reforms. The crisis of 1997 - 1998 has had some effect in binding Asian countries more closely into the developing global market-oriented forms of economic organisation and in weakening the role of the governments, state industries, and government client firms in the economy. However, the development of nuclear weapons by India and Pakistan signals a degree of geopolitical freedom from global constraints.

Asian Countries [8] together already consume about 30 per cent of the world's energy, as much energy as North America and 50 per cent more than Europe. The same factors apply to oil. In 1998 the Asia Pacific countries consumed more oil than the United States or Europe. Even after the 1997 - 1998 Asian crisis, projections for 2020 suggest Asia will then consume around 40 per cent of the world's oil and 40 per cent of its energy. Over half of Middle Eastern oil production, and 60 per cent of its exports already goes East, rather than West. These proportions will rise as Asia takes a larger share - the greater part of world oil trade in the future.

In the panorama of Asian scenarios three cast their shadow over global energy:

The growth of China as an energy importer. It has a growing interest in diversifying from dependence on Middle East oil and on import routes dominated by the US: hence the Chinese Government and state companies are showing a strategic interest in the import of natural gas and oil by pipeline from eastern Siberia and Central Asia; Gas pipeline developments could significantly reduce the growth of imports of Middle East oil into China: in terms of increasing the availability of oil for other importers the effect could be at least as great as the more realistic figures projected for Caspian Oil. [9] However, the commitment to the infrastructure investments necessary depends on a degree of political support from the two Governments concerned, sufficient to attract the foreign investment necessary for the development of the Russian gas reserves and probably the financing of part of the infrastructure and market development costs.
Among all the Asian oil importers, only Japan is a full participant in the IEA, joining in its emergency sharing mechanism and its objective of holding strategic stocks of oil. Moreover, among the major importers, only Japan has fully liberalised its oil import and pricing system. A disruption of oil supplies to East Asia would be accompanied by acute local shortages in countries highly dependent on imports and the pricing mechanisms to deal with such disruptions would be likely to be hindered by Government attempts to shelter consumers from the effects of scarcity pricing.
The nationally-focussed attitude of many Asian governments towards energy markets contrasts with the interest shown by many Asian energy companies in playing international roles. However, their government no doubt endorse the activities of the Chinese National Petroleum Corporation in Central Asia, Venezuela and Iraq, Petronas in several areas, and other regional companies in re-exporting refined products outside their borders. At the same time the growth of Asian markets is reducing the weight of major western-based oil companies in the world of oil refining and marketing. Their operations are based in the slower-growing OECD economies and they have been excluded from major Asian markets such as China, India and Indonesia. The accountability of the regional companies to their home country governments and public opinion is different from that of the US and European companies. At its simplest, regional companies may not be as concerned about environmental and human rights issues as companies accountable to the public in Europe and North America. [10]

What is the Energy Security Problem?

In the pragmatic Anglo Saxon tradition I doubt whether there is a general definition of energy security. Its objectives cannot be downloaded from some master template. The phrase "security of adequate supply at fair prices" is not meaningless but it is not a plan for action. Countries have different endowments of resources, are committed to different energy consumption systems, and have different political and constitutional biases. I believe we have to ask:

Security for whom?
Security against whom?
Security to do what?

Securing National Independence

At the most basic level a nation might look for security to support its military and the essential civilian needs to protect its independence in time of war. What is "secure" depends on one's view of the enemy and the likely nature and duration of the war. Nations seldom plan for perpetual war or even long wars, so that the kind of security required is short-term. The argument is about how much, rather than about whether, there should be military stock, levels of compulsory storage of fuels to match essential needs, and whether installations and transportation are adequately protected. In the case of security against the British coal miners it was important whether coal stocks were held at the power stations or at the mine-heads. Though the problem is technically quite complex, the argument is conceptually quite simple: How much is the country prepared to pay for strategic reserves?

Securing Domestic Policies

At the next level a nation might look to protect its freedom to manage its internal affairs in. UN sanctions against oil supplies to South Africa during the Apartheid era, and US or UN sanctions against Burma, Serbia, and Sudan today, are intended to affect domestic policies in the sanctioned countries particularly with respect human rights. As well as governmental sanctions, countries may also be sanctioned by investors or by consumers for human rights or environmental reasons. Energy trade, and dependence of energy exports, may be a target in such cases.

Apartheid was not brought down by energy sanctions - though other international sanctions, especially on lending, may have contributed. [11] South Africa achieved minimal "energy import dependence" in an economy endowed with sufficient cheap coal to power the electricity sector and provide an expensive but significant supply of synthetic liquid fuel. What oil imports remained necessary were obtained from minor exporters at premium prices. South Africa's reason for incurring these economic costs was not fear of an oil cartel but the difficulties it foresaw in defending political institutions which were universally condemned by governments and public opinion of major countries outside South Africa and by the majority of members of the United Nations.

The lesson from South Africa's near "energy independence" is that if a country expects its domestic policies to be permanently offensive to powerful countries, then it needs to prepare for long term reductions in its sanctionable dealings with those powerful countries. It may look for other trading partners, or it may seek to reduce their dependence on trade, or some combination of the two - this was indeed the South African position during the Apartheid regime.

Such considerations may be an element in policy debates in Beijing today, but it would be surprising for them to attract big budgets for energy independence in Washington or the capitalised of Europe.

Securing Foreign Policy

A further level of security concerns a country's freedom to practice an independent foreign policy, or at least to avoid having other countries impose constraints on its foreign policy by threats to deny it the energy supplies or markets or make them damagingly expensive (or unprofitable). This was the objective of the unsuccessful Arab Oil Embargo of 1973, which was designed to diminish international support for Israel, then at war with Egypt and Syria.

Foreign policy is also the prime target of the US current energy-related embargoes against the so-called "rogue states" of Libya, Iran, and the UN sanctions against Iraq.

How long term are these conflicts? In the case of the Arab - Israeli conflict there has been since 1973 a peace treaty between Israel and Egypt, an agreement with the PLA, and a peace process which is still going and which may lead to a peace agreement between Israel and Syria. There have been changes towards normality in Iranian and Libyan relations with European countries, following developments within the two countries targeted by the US. Iraq has less to show. One cannot say that US - Iranian hostility, or US - Libyan hostility is permanent, or that Iraq is a permanent pariah. The sanctions do not cost the US much - a few lost investment opportunities for US based oil and service companies, and in the case of Libya at least they may have contributed to changes in Libyan behaviour outside its borders. How much should the sanctioned countries spend to minimise the effects of sanctions?

Long Term Costs and Effects of Sanctions

In the case of Iran, the question might be how much better terms does Iran have to offer non-US companies to invest in Iran. The terms evident in the oil sector so far do not appear generous to the foreign investors - it could be argued that they are actually more severe than those offered in the recent past by Venezuela or the terms available in a number of developing countries. This suggests that Iran at least, does not need to incur major costs to avoid the effect of UN sanctions on its energy and energy-related trade. For the US, the sanctions do not materially reduce the supply of energy, or increase its price, in the US.

Dealing with Short-term Threats

I have argued above that most concerns about energy security for defence and foreign policy reasons are short term questions. Subsidising investment extra permanent domestic energy supplies for normal use does not provide spare capacity when there are interruptions of the remaining trade. Interruptions can be taken care of by a combination of strategic stocks, collective measures such as the International Energy Agency emergency sharing procedures, and of course by general foreign policy measures to pre-empt sanctions.

Strategic stocks are not negligible: Stocks which cover 90 days of total oil imports would cover 900 days of a 10 per cent shortfall. In the open and global market for oil and coal and the international markets for gas, it is almost always going to be cheaper to store fuel than to build spare capacity which is not used under normal conditions (the so-called "spare oilfield idea). Only if a country expects to be permanently at odds with the world and to face widely applied sanctions is investment in major long-term reduction of energy trade likely to be taken seriously.

Economic Security

A more complicated question arises when importers look for long term investments to reduce exposure to the risks of cartel pricing by exporters or when exporters make subsidised investments to diversify their economies to reduce dependence on unstable and insecure export markets. By definition, the question only arises for importers when imports are the cheapest energy source and when avoiding them means giving up some of the benefits which energy trade, like other trade, confers on both importers and exporters.

For exporters there are some arguments about developing long term alternatives to provide revenue and employment when oil reserves are depleted. For the major exporters, this is a couple of generation off. [12] It is precisely their great capacity to expand production that generates inevitable competition between the major oil exporters and makes the establishment of a sustainable cartel so difficult.

I have argued earlier in this paper and elsewhere [13] that fear of OPEC sustaining cartel pricing for oil is not justified:

there are too many alternative source of energy;
there are too many alternative sources of oil;
the interests of the OPEC members are too diverse to sustain any system for sharing the market because there is no obvious long term basis for "fair shares".

Security and Self-sufficiency are not Identical

Even if the risk of cartel pricing for oil were serious, elimination of energy imports is for most countries a prohibitively expensive option. The US, the world's richest and most powerful nation, abandoned the "Project Independence" set up by President Nixon. For certain countries, such as Japan, independence is simply not feasible, though some countries, such as France, have effectively secured their electricity system against the costs and benefits of trade by massive investments in nuclear power through a state-owned monopoly. The economics of nuclear power, quite apart from the environmental problems, do not seem to support such investments today. Moreover, nuclear energy and nuclear waste storage and treatment carry environmental and health as well as security risks.

The costs of subsidising investment in domestic energy suppliers, or investment in subsidising energy saving, are such few countries will try to forego the benefits of energy trade completely in order to avoid its risks. The question of economic security then becomes a relative one: is a country more exposed than its main economic competitors and political rivals to the economic risks of energy trade? The answer for Europe is reassuring: In 1998 Europe and the US both produced just over 40 per cent of their oil consumption: Japan and Korea produced none. Oil imports as a fraction of total energy requirements in 1998 were 23 per cent for the US and 24 per cent for Europe; 51 per cent and 56 per cent for Japan and Korea respectively. Europe is not more exposed to the risks of energy imports than its principal economic competitors, and would damage its competitive position if it incurred high costs to reduce those risks.

There is a complex argument that investment in alternatives to oil would not only prevent cartel pricing, but would so reduce demand that the price of oil would fall . This outcome would require even greater subsidies for the alternatives - but perhaps would secure some terms of trade advantage to importing economies relative to oil exporters

Finally, the British question again: are imports, say oil or gas, really the least risky option compared to domestic alternatives?

The Dangers of Focus on "Import Dependence"

The evidence of the last 25 years that the growth of competitive markets, and the removal of price and investment controls, has led to the growth diversification of oil supplies and the developments of substitute fuels. Countries that considered "energy independence" options in the 1970s and 1980s have abandoned them for reasons of and practicality.

The equation of "security" with "reducing import dependence" is dangerous for three reasons:

In general, policies to reduce import dependence have to work within limits of affordability and acceptability which mean that they do not eliminate or even seriously reduce the risks attached to imports. Do changes of 5 or 10 per cent change a country's exposure to diplomatic and political pressures? I suspect probably not.
However, denying the benefits of energy trade is generally expensive and the more the economy is burdened with such costs the less competitive it will be. For the major industrial countries or groups of countries, the dependence on energy imports is not very different, though they are higher in Asia than in Europe or North America. Weakening one's economy for the sake of reducing energy imports also means weakening the capacity to in vest and not least to sustain military defensive expenditure and support a proactive foreign policy.
Finally, focussing on the level of imports in individual countries distracts attention from the global policies which can enhance energy security and national security for all countries by cross-border investment to increase global energy supplies and energy efficiency where it is cheapest to do so, and where supplies will be available commercially through competitive markets and free international trade.

Energy and Security Policies for the Future

Strategies to Support Global Energy Markets and Investment

The object of these strategies is to promote the long term economic development and diversification of energy supplies globally, investment in energy-efficient consumption everywhere, and the efficient operation of international and national energy markets. The market objective also contributes to the flexibility available to deal with short-term threats or disruptions or sanctions. A more specific agenda might look like the following:

the promotion of competition within domestic energy markets as well as internationally - to make substitution and inter-fuel competition stronger;
promoting investment in energy efficiency by correcting information failures and addressing obstacles to investment affecting technology and equipment - including for example vehicles - where energy efficiency can be cheaply improved. Such policies tend to support environmental objectives such as reducing greenhouse gas emissions and go with the grain of increasing the efficiency of markets in the economy generally. Agencies such as the WTO World Bank and the International Energy Agency can (and already do) encourage the opening of markets and the removal of subsidies for energy in developing countries.
The promotion of free trade and investment in energy related industries (and the transfer of energy efficient technology internationally). This includes the development of the Energy Charter Treaty to protect energy transit and cross border energy efficiency investments. [14] It may also include a proactive role by international financial agencies in promoting the development of new cross-border pipeline infrastructures. What was done by the World Bank for Bolivia and Brazil, or the European Investment Bank for the line from Algeria through Morocco to Spain, may also be done for some of the Caspian and Central Asian export routes or for lines for exporting East Siberian gas to East Asia.
Addressing certain specific international political issues where there are implications for the expansion of international energy trade and investment. Examples are the status of the Caspian Sea and the South China Seas where there are territorial disputes.
Working with international companies and NGOs to develop acceptable codes of conduct regarding environmental protection and human rights in countries where energy developments involve problems of this kind.

Some would also argue that there is a case for exploring the possibilities for reducing some of the market uncertainties faced by energy exporters, and their economic consequences, in order to encourage the steady growth of investment in those countries under conditions conducive to their sustainable development.

What is Different

The policies described above, with their global focus, would have seemed unrealistic in the conditions of the early 1970s which were described earlier in this paper. Now, they run with the trend of domestic and international, policies towards trade and security. They are co-operative in character, unlike the nationally-centred policies, which some of them contradict. There is a difference between designing policies which reduce the risks of international energy trade by making them more efficient and diverse, and policies which reduce a country's international energy trade. Promoting trade and investment and removal of subsidies may go against national policies to subsidise and protect national energy industries or domestic energy policies which subsidise energy or impede the development of energy-saving and efficiency investment for domestic reasons. [15] Indicators such as "import dependence" reflect only the old approach - and do not reflect its costs under today's conditions, either direct or in terms of reducing the flexibility or international energy supplies and their ability to absorb shocks.

Measures to Deal with Temporary Energy Emergencies

Security policies are still needed to enable energy importing and exporting countries to mitigate the effects on their defence capability, foreign policy, and short term economic activity of sudden but short-term threats to supplies or markets.

For importers, the recipe is quite familiar:

Maintaining strategic stocks of fuels corresponding to essential demands;
Participation in collective schemes such as the IEA emergency sharing system in order to "pool the risks". There is clearly a case for trying to increase the participation of Asian countries in the IEA emergency response arrangements.
Being prepared in extreme cases, to support UN actions to protect energy supplying countries against aggression.

For energy exporters suddenly faced with sanctions which deny them markets, the available options are much less clear. It is another sign of the general difficulties of achieving common cause among energy exporters that no collective response has been made to the sanctions applied to Libya or Iran. There is an imbalance of power against the exporters in this regard.

Summary

In contrast to 1973, we have today a world in which:

There is a 25 year record of expanding and diversifying oil and gas supplies in open and competitive markets
There is no cold war and balance of superpowers
Governments almost everywhere are promoting competitive markets and fiscal discipline, rather than economic planning, as the keys to growth in a world of freer trade and cross-border investment.

In this world the economic risk of an OPEC or Middle Eastern cartel of oil exporters permanently distorting international oil prices in their favour is very small. The leading oil exporters are political rivals as well as economic competitors. Europe is no more exposed to such a risk than its principal competitors.

The economic risk of energy trade risk can be further reduced by policies which promote the free movement of energy and energy related goods and services (for example by institutions such as the Energy Charter Treaty). Multilateral interest in the economic and political conditions for new cross border infrastructure investment in the Caspian region and within Asia would also help diversify energy supplies for Asia.

Policies to reduce the economic risk of energy trade by subsidising domestic investments would limit the security and flexibility which the global system provides. Such subsidies and market distortions impose costs on the country which adopts them.

Whether countries seek to reduce economic risks by strengthening the global markets or by avoiding their benefits, fluctuations in international oil, gas and coal prices are inevitable because of fluctuations in demand, leads and lags, changes in investment conditions, and other factors which normally affect commodity prices.

The risk remains of temporary disruptions in supply or markets for political reasons. These may be accidental, caused by local instability or conflict, or they may be deliberate, as in the case of sanctions and embargoes. Since 1973 (and except for the case of South Africa) sanctions have generally been used by importers or the UN to deny markets to exporters, rather than to deny supplies to importers.

Sanctions on energy imports or exports may threaten national independence, support foreign interference in domestic affairs, or restrain a country's foreign policy. There is therefore a case for governments to provide protection against such short term shocks or threats. For most oil importing countries, long term policies to reduce oil imports or exports by subsidising alternatives do not of themselves provide the flexibility to mitigate short term shocks, because it is too expensive to give up the benefits of oil trade altogether, and because shocks and sanctions will be disruptive at any significant level of trade. Oil exporting countries face parallel problems with regard to diversification from dependence on oil export markets.

Expensive moves to reduce dependence on energy trade to avoid these political sanctions only make sense for a country which expects to be permanently in serious conflict with the world's major powers and with the United Nations. For other countries, the policies which address these short term risks are the same as were available in the 1970s: strategic stocks of oil and oil products, and emergency sharing schemes such as that of the IEA. The extension of such policies to more Asian countries is desirable because of their growing importance in the world economy and oil markets. Political and diplomatic attention to the causes of instability and sanctions would also help.

References

Energy Information Agency, US Department of Energy: Energy Information Agency, US Department of Energy: International Energy Outlook, 1998, Washington, 1998, p. 34
International Energy Outlook, 1999, Washington, 1999, p. 28
A Konoplianik: Caspian Oil at Eurasian Crossroads: preliminary study of economic prospects, published by the author, Moscow, 1998
Whether Iraq will ever pay the contribution demanded from it by way of reparations is another matter.
These percentages are based on the reference case of the 1999 International Energy Outlook, published by the Energy Information Agency of the US Department of Energy. The projections in the International Energy Agency's World Energy Outlook 1998 suggest a slightly lower Middle East share of world oil trade.
Oil reserves data from BP-Amoco: Statistical Review 1999, p. 4. Population data from World Bank: Development Indicators 1999, table 1.1.
In the long term some limited market might develop in China, but the medium term prospect for Chinese gas imports to come from currently undeveloped fields in East Siberia and Central Asia, not from the fields in North Siberia which are linked to Western Europe.
Including the Middle East, which accounts for 6 per cent of world oil and 4 per cent of world energy consumption.
See Mitchell, John V; Vrolijk, Christiaan: Closing Asia's Energy Gaps, RIIA Briefing Paper, Royal Institute of International Affairs, London, 1998.
The replacement of Texaco by Petronas as an investor in the Burmese gas pipeline project is an example.
See Spence, Jack: "South Africa: a Case Study in Human Rights and Sanctions" in Mitchell, John V (ed.): Companies in a World of Conflict, Royal Institute of International Affairs & Earthscan, 1997, London.
At 1998 rate of production, proved reserves in Iraq, Kuwait and the UAE cover over 100 years' supply, for the figures are 80 years for Saudi Arabia and 60 years for Venezuela.
See Mitchell, John V et al: The New Geopolitics of Energy, Royal Institute for International Affairs, The New Geopolitics of Energy, 1996, London.
OECD/IEA: World Energy Outlook 1999 Insights, Paris 1999, p. 3: "Energy resources are significantly under priced in eight of the largest countries outside the OECD, which represent collectively around a quarter of world energy use."
For example, in the UK, by taxing energy conservation material and equipment for households more heavily than domestic fuels.