Energy Security Policy

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North American Energy Security and Energy Policy: 

North American Energy Security and Energy Policy Bryne Purchase Queen’s Institute for Energy and Environmental Policy


PRESENTATION OUTLINE Reminder of importance of energy to the North American way of life, provide a definition of energy security; Outline a few historical facts on oil and geopolitics; Review the current geographic concentration of fossil fuel reserves and our growing vulnerability to oil, and potentially future natural gas, supply disruptions; Describe briefly why the economics of the energy industry can lead to dramatic price change and the potential macro-economic impact of major supply disruptions; Conclude with some very deep and potentially divisive questions about Canadian energy and security policy.

North American Energy Security: 

North American Energy Security North American culture is truly an energy based culture: consume about 29% of world’s annual energy supply but represent only 6.9% (443 million) of the world’s population (6.5 billion). extreme dependence on fossil fuels (84.3%) as the primary sources of our energy supply: oil (40%); natural gas (24%); and coal (20.3%). What is energy security? A reasonable degree of assurance that: a prolonged and large scale supply disruption will not occur; and/or that, if it does occur, its impact will be tolerable. The terms “reasonable degree of assurance” and “tolerable impact” are inevitably subjective. But then security of any kind is, ultimately, in the mind of the beholder. Energy security is no different in this regard.

North American Energy Security: 

North American Energy Security Why North American energy security? Canada- US Free Trade Agreement and NAFTA. No “National Energy Policy” – if anything it is a Continental Energy Policy The specific security threats I have in mind are politically motivated: Terrorist attack against critical energy infrastructure inside North America or abroad; Possible future military conflicts between nation states (eg US and Iran, China and the US?).

Oil and Geopolitical Conflict: Early 20th Century: 

Oil and Geopolitical Conflict: Early 20th Century Oil was at the centre of military strategy throughout the 20th century, beginning with two World Wars: Conversion of British fleet to oil prior to WW l: security of supply concerns lead to Government financial support for opening of Persian (Iranian) oil fields - leads to British Petroleum. WWI introduces mechanized, mobile warfare (tanks, trucks and planes). WWII: Germany invents Blitzkrieg warfare; lifeblood is fuel. Germans invade Russia to secure oilfields in the Caucuses. Coal liquefaction invented by Germans (47% of transport fuel supply at peak); US oil embargo of Japan in early 1941. Japanese pre-emptive strike at Pearl Harbour in December, as Japan tries to secure Indonesian oil fields.

North American Oil Dependence and Vulnerability: 

North American Oil Dependence and Vulnerability In 1945, North America was a net energy exporter and self-sufficient in oil, natural gas and coal. The US was the world’s largest oil producer (50% of world production even as late as 1950). US supplied most of the oil needed by the Allies in WWII. Pursued a regulated domestic pricing policy. To-day, US oil production in lower 48 states peaked in 1971. N.A. imports 39.8% of oil requirements (9.6mbd) - produced 14.5 million barrels of oil per day (US: 7.6; Mexico 3.8 and Canada 3.1mbd) and consumed 24.1 million barrels per day (US 20.7; Mexico 1.4 and Canada 2.0). A global oil market exists where global pricing, allocation prevails.

Geopolitical Importance of Persian Gulf & Saudi Arabia: 

Geopolitical Importance of Persian Gulf & Saudi Arabia In 1943, President Roosevelt declared defense of Saudi Arabia “vital” to US national security. Military aid and political commitment has grown as US oil imports and Saudi production has grown. Today, Saudi Arabia is THE key world producer at from 8.5 to 10 mbd; 23% of world’s conventional reserves of oil; 80 to 85% of the spare capacity in the world; Half of Saudi output comes from one oil field and 66% of Saudi production goes through one plant and two terminals; Increasingly unstable regime.

Persian Gulf and Caspian Sea Security : 

Persian Gulf and Caspian Sea Security Persian Gulf region today contains almost 65 percent of known world conventional oil reserves (5 of world’s top oil producers): provides 28% of world supply, expected to rise to 43% by 2030; 68% of Japan’s oil requirements come from Persian Gulf and 45% of EU oil imports ; US imports only about 2.3 mbd from Gulf countries, but the key is that global pricing and economic interdependence makes all vulnerable; “peak oil” will only increase the dependence on this region; Much of world oil trade goes through Straits of: Hormuz (14 mbd); Bab El-Mandeb; Bosphorus ( alternate route: Baku-Tbilisi-Ceyhan buried pipeline); Malacca (11 mbd). The countries involved are virtually all Islamic countries with political, social and religious traditions which are often radically different from the West. Energy revenues represent most, if not all, the available foreign exchange.

Middle East and Energy Security: Post WWII: 

Middle East and Energy Security: Post WWII 1951-1953 PM Mossadegh of Iran nationalizes Anglo-Iranian Oil Co, leads to CIA/MI6 plot to oust PM, keep Shah. Suez canal crisis of 1956. President Nasser nationalized canal (66% of Europe’s oil passed through Suez): Israel, France and Britain attack. 1973 Arab-Israeli War, the Arab oil embargo of the US and the first OPEC price spike (OPEC had 56 % of world production). 1979 Iranian Revolution, ousts Shah and introduces Islamic republic: leads to the second OPEC price spike. FSU occupies Afghanistan (1979).

Middle East and Energy Security: Post WWII: 

Middle East and Energy Security: Post WWII In 1979, President Carter declares access to oil a “vital national interest”, to be defended by “any means necessary”. Carter doctrine is still a central pillar in US foreign policy; Carter establishes rapid deployment military force to secure US and Allied interests - made permanent in 1983 by President Reagan. Central Command – one of five unified commands covering the globe and has suffered far more military casualties than any other US command.

Middle East and Energy Security: Post WWII: 

Middle East and Energy Security: Post WWII Series of inter-related wars involving oil and related terrorist and regional security concerns: Iran-Iraq war (1980-88); Iraq invasion of Kuwait (1990) and the 1991 Gulf War; US forces in Saudi Arabia leads to 9/11 attacks on US in 2001; US led invasion of Afghanistan (2002). US led invasion of Iraq (2003). Now a quagmire in which the US and its Allies cannot “win” and cannot leave without the grave potential for a region destabilizing “civil war.” (Sunni/Shia and the Kurds)

North American Energy Dependence and Vulnerability: 

North American Energy Dependence and Vulnerability What About Natural Gas? N.A. consumes 29.2% of world production and has 4.1% of proven reserves. North American conventional natural gas production is close to peaking. Future supplies to meet growing demand will depend increasingly on imports of Liquefied Natural Gas (LNG). LNG trade reasonably well developed in Asia and Europe. North American gas prices will be set globally once LNG trade matures. Already NA and European gas price convergence.

North American Energy Dependence and Vulnerability: 

North American Energy Dependence and Vulnerability What About Natural Gas? Natural gas has ultimately the same security risk potential: The Middle East in total has 40.6% of world’s known reserves; The largest proven reserves of natural gas are in: Russia (26.7%), Qatar (14.4%), and Iran (15.3%). Europe already dependent on imports of natural gas: Today, OECD Europe imports about 40% of its consumption needs, growing to 66% by 2030. Druzhba pipeline (world’s longest). Currently 40% of EU gas imports are from Russia ; Algeria (30%); Norway 25%). By 2030, Russia alone expected to supply 60% of gas imports. Russia has shown an increasing willingness to use access to energy as a political tool.

North American Energy Dependence and Vulnerability: 

North American Energy Dependence and Vulnerability What about coal? In 2004, North America had 279 billion short tons of coal – 96% of which is in the United States. North America has 28% of world’s reserves or 250-300 years supply at current consumption rates. Russia(17%); China (13%) and India (10%). Coal already supplies 50% of US electricity needs and this could be expanded throughout NA..Liquid transport fuel can be made from coal by the Fisher-Tropsch process. Key issue about coal is the high environmental costs, in particular air pollution (NOx, SO2, PM, CO2) and mercury. However: Clean coal technologies are available at higher capital cost to produce electricity ; Can sequester CO2 in underground storage (enhanced oil and gas recovery or in deep saline aquifers); But no technically feasible alternative is instantly available and in large scale.

Economic Impacts: Fundamentals of Energy Supply: 

Economic Impacts: Fundamentals of Energy Supply Fundamentals of energy supply: Mega-projects dominate: large economies of scale in production (extraction, pipelines, tankers, refineries, electricity generation, transmission and distribution) Very capital intensive facilities (huge financing requirements $100 millions - $billions) Very long lived facilities: 25 to 40 years or longer; Very long regulatory approval process and construction time (eg nuclear, oil sands, etc) (5 to 10 years or longer); Energy storage is limited and costly; All these risks lead to Boom/Bust investment cycle.

Supply & Demand: Price Inelastic in Short Run: 

120.00 90.00 70.00 50.00 Supply & Demand: Price Inelastic in Short Run 0 50 100 15 0 Price($/barrel) Output (millions barrels/day) S’ D’ D’ S’ In general: High impact supply/demand disruption -High financial risk S

Economic Impact of Price or Availability Shocks: 

Economic Impact of Price or Availability Shocks All economic downturns in the U.S. since 1973 have followed an oil price spike: OPEC energy price shocks are credited with producing a 7% decline of real GDP in OECD countries in ’74/75 and 7.25% in ’80/82. Recent energy price increases have had less macro impact on the Western economies: Less energy intensive; Labour markets have changed; Asia absorbs much of the energy price impact, without inflation. For Canada ( a net energy exporter) the short-run macro-economic impacts may be positive. But significant inter-regional reallocations: For example, Ontario economy is very energy “dependent” in its manufacturing sector and on the US market. Quandary for Canadian monetary policy: regional disparity of impact. But energy security may now be more about what happens in a “catastrophic” event embargoing a significant portion of world’s oil supply for a prolonged period.

Conclusion: Energy Security Policy Questions: 

Conclusion: Energy Security Policy Questions Where does Canada’s energy policy fit in this picture? Is energy security a legitimate concern of Canadian public policy or should it be left to the private market? Should Canadian public policy attempt to subsidize domestic energy production (eg nuclear, biomass, etc), promote alternative transportation fuels ( eg coal liquefaction) and/or otherwise limit the import of energy (eg LNG) from overseas? If so, how much “security” should we buy and what price should we pay? Should Canada simply react to US national energy policy and our most strategic and powerful Ally’s perception of Continental Energy Security? Should Canadians be prepared to assist in protecting (by “any means necessary”) international energy transport and supply facilities from any and all aggressors?

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