Some questions and answers about the oil and the political battle to secure it

Is energy security a political, military or market problem?

Developed nations are facing a severe energy security crisis, according to many analysts. And at the heart of energy security are many of the most important political, economic and environmental questions facing the world.

Perennial tensions in the Middle East affect oil supplies. Russia falls out with its neighbours over the supply of gas. Stark warnings of environmental catastrophes demand big changes to energy use. Nuclear power is clearly back on the agenda in some nations.

However, Cambridge University’s Pierre Noël, argues in the FT that the increasing use of energy resources as political tools does not in fact justify a tough new paradigm for energy security policy. He argues that ensuring a free global market in energy is the best line of defence.

So what are the biggest energy security challenges for the world? And what are the best solutions? What, for example, is the role of energy hungry China? How should the European Union deal with Russia?

Our thanks to Dr Noël for answering these questions on Thursday, 17 January 2008.
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’Energy Security’ has become a very frequently used term, but it also seems to be one of the most poorly defined. If we assume that a useful definition goes beyond the assumption that states who have energy are ’secure’ and states that don’t are not, what can you offer by way of a definition of Energy Security, and what are its key dimensions?Iain Grant, Alberta, Canada


Pierre Noël: The most popular definition of energy security mentions the ‘availability’ of energy, its ‘affordability’ and often its ‘environmental sustainability’. This is not a very useful definition.

Affordability is a relative notion: affordable to whom and to do what? Furthermore, energy commodities become less affordable when markets are tight, but that is the very condition for them to remain available. Adding environmental sustainability is not helpful because most of the time there is a clear tradeoff between the ‘affordability’ of energy and its environmental impact.
Clean energy is relatively expensive.

I would advocate a narrow definition of energy security, centered on the availability of energy to those who are willing to pay the market price. Energy insecurity can then be linked to situations when energy markets do not function properly. Energy security policies should be mostly aimed at ‘making markets work’ and letting them work when they do.
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Who will get the last barrel of oil? The country the oil is extracted from, the country with the most money, or the country with the most weapons?Wayne Rogers, Canada

Pierre Noël: There will be many ‘last barrels’ consumed at the same time, probably by relatively poor people in relatively poor countries – some of them extracting oil.
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Is the American policy of projecting military might across the oil-rich Persian Gulf and its support for reactionary governments in the region misguided? After all, even the most hot-headed revolutionaries in the region still need to export oil to survive so there is no meaningful threat to the west’s energy security, whereas the US policies ensure that democracy and pluralism will not take root in the area. Borzou Aram, London

Pierre Noël: Protecting the flow of oil to the world market probably does not require a permanent, massive US military presence in the Gulf. Some in Washington are openly talking about moving back to an “over the horizon” military posture.

The US has long acted as a policeman in the Middle East, simply deterring the “bad guys” (Iran, then Iraq) from unsettling the status quo. When deterrence failed with Saddam Hussein in 1990, the US did not hesitate to send massive military power to the region. Under GW Bush the policy has changed radically as the US has transformed itself into a political engineer in the Middle East, trying to re-draw the political and ideological map of the region.

This policy shift was certainly not required in terms of energy security and it has had negative energy security consequences – not only for the US but for all consumers.
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Are Europe-based energy sources like wind and nuclear bringing more or less security of supply? Jean-Michel Glachant, University Paris Sud, France

Pierre Noël: Wind is an intermittent source of power supply, unpredictable and relatively concentrated geographically (Scotland in the UK example). Massively increasing the share of wind in the electricity mix, as Europe and the UK want to do, almost certainly decreases energy security (or, which is the same thing, increases the cost of maintaining the reliability of the electricity system).

Nuclear is probably neutral in terms of energy security compared to other non-intermittent sources (coal, natural gas).

The fact that wind and nuclear are ‘non-imported’ sources of energy is irrelevant as far as energy security is concerned.
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There is a view that the current spike in energy prices is here to stay, at least for 5-10 years, due to underinvestment in oil and gas production infrastructure. Do you see this current period of high prices being different to those in the past in that they are stimulating a significant shift to alternative energy sources or will oil remain the main source of energy? If so, what do you see being the dominant trends in energy production? Adam Keats, London

Pierre Noël: I will not try to predict the price of oil! That said, the current period of high prices is clearly different from previous periods. Production outside OPEC and the Former Soviet Union has stopped growing, despite five full years of very high prices and record investment budgets from oil companies. It is probably very close to its maximum possible production. In that context, growing demand has come and ‘bumped up’ against production capacities in the Middle East, sending prices to the current levels.

If anything it will be more difficult, not less, to shift to alternatives this time. The 1970s oil shocks had triggered massive substitution, especially in the power generation and industrial sectors. Some of that might be replicable – at a cost – in developing countries, especially Asian emerging economies. But in the OECD oil demand is now highly concentrated in the transportation sector where price elasticities are low.
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The current global energy market is anything but free. The biggest cartel in the history of market economy prevents national governments from responding with free market measures. Do you believe a free global market can exist with the presence of OPEC? Zhou Xi, Hong Kong

Pierre Noël: No market is perfect and the oil market works much, much better than most. All other things being equal, the price would be lower without OPEC, no doubt. But OPEC is here to stay and its market power is bound to increase with the peak in non-OPEC supply.

The relevant policy question is: ‘What should we as oil consumers do to ensure the highest possible level of energy security?’ The answer is:
1. Let the market work freely, always.
2. Maintain emergency storage
3. Invest in R&D for alternative transportation technologies and fuels.
The most important is No. 1.
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Is it possible to calculate the cost in dollars per barrel of securing oil supply through US military intervention in the Mideast Gulf since the first Gulf crisis in 1990-91? Is this a wise foreign policy, and does it make the Pentagon the source of US energy policy rather than the Department of Energy? Ian Bourne, London

Pierre Noël: Academic studies have consistently valued the ‘energy security premium’ at between zero and $0.33/gallon. The price in the US is currently around $3/gallon.
Most of the US military presence in the Middle East is not required to protect the oil market.
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Do you believe that we are living in a time of constricting oil supply based on the Hubbert Peak theory? Ambrose

Pierre Noël: I believe that oil supply will eventually peak. As it continues to grow, by definition it has not peaked yet!
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What options do developing countries have in the future if US, Europe and others impose restrictions on the imports from the countries with no regulations on GHG emission reductions and force developing countries to adopt ’costly’ clean energy options, restricting power generation from cheap and abundantly available coal for their energy security? Hari, Auckland

Pierre Noël: Such taxes would increase the price of imported goods in developed countries (cheap Chinese goods would become a bit more expensive). I doubt it would significantly accelerate the transition of China towards a cleaner energy economy. But these taxes might be welcomed by European and American manufacturers.
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In the case of China, for example, national oil companies are increasingly driven by government agenda to seek resources elsewhere, almost making oil deals into government diplomatic exchanges instead of business transactions. With China’s growing influence, do you believe that re-nationalisation of this sector is inevitable? Zhou Xi, Hong Kong

Pierre Noël: Chinese oil companies seem already to enjoy significant – though far from complete -- strategic autonomy, and will probably enjoy more in the future. They try to build portfolios of assets outside China and they go first where there is relatively less competition (places where international oil companies are reluctant or banned to go). Both the Chinese government and the resource-owner governments love to include these deals into wider diplomatic packages but these are primarily commercial deals which make commercial sense for the Chinese companies.
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The Stern Report described climate change as ‘the greatest and widest-ranging market failure ever seen.’ Correcting market failures typically requires government, i.e. political intervention. How would a free market in global energy address these market failures and help us address the impacts of climate change? Chris Morrison, London

Pierre Noël: Energy markets themselves will simply not address climate change, at least not in a meaningful way. This is why I think it is not helpful to bundle energy security (strictly defined) and climate change into a single, wider definition of energy security. For climate change, the exact size of the market failure is disputed (Stern’s view of the size is clearly way above all other academic economists) but its existence is not and it is certainly a very large one. For energy security, the size of the market failure is usually vastly exaggerated by commentators and politicians.
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I have two questions: 1) The EU and the Russian Federation (RF) have an evolving partnership in energy trade. Can this relationship create observable spill-over effects on the EU-RF political relations? 2) Turkey is an EU candidate country bordering Middle East, Balkans and the Caucasus. What kind of role would Turkey play with regard to the EU-RF energy trade relations? Argun Baskan, Turkey

Pierre Noël: I think that the best the EU can do is to organise its gas market in a way that minimises the impact of supply disruptions, whatever their origins and causes. Europe needs an integrated, competitive gas market which would vastly increase the level of security of supply enjoyed by European consumers. France and Germany fiercely resist because their big gas companies would lose their comfortable (and profitable) positions.

An integrated and competitive gas market in Europe would also trigger a complete re-structuring of the EU-Russia relationship, reducing Moscow’s ability to leverage its bilateral energy links in the foreign policy sphere.

Some see Turkey as a key transit country for Central Asian and Middle East gas exports to Europe. I do not think that Turkish membership of the EU would significantly increase the likelihood of such projects.
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How do you see Asian countries, particularly China using sovereign wealth funds to secure energy resources? How important will the Straits of Malacca be for these countries’ foreign policies? Stephen Ranger, Seoul, Korea

Pierre Noël: The Malacca problem is vastly exaggerated. If the straight were closed, tankers would take a longer route to the South – freight rates would go up, end of story.

About sovereign funds: buying oil and gas reserves abroad will not provide Chinese consumers with any additional energy security. For China - as for every other country - energy security is mostly built at home. Oil supply insecurity in China (chronic shortages of oil products) is due to price regulations and restricted freedom to import crude and products. It has nothing to do with a lack of ‘control’ over oil reserves or shipping lanes.
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About the expert: Dr Noël is at the University of Cambridge’s EPRG, an energy and environmental policy research group and also a Senior Policy Fellow at the European Council on Foreign Relations. He has worked for almost 10 years on the interaction between foreign policies, energy markets and international security. He specialised in US international oil policy and now works also on Chinese energy security policies, the EU approach to international energy issues, and the geopolitics of natural gas markets.