Mr. Kalicki is a former counselor to the U.S. Department of Commerce and co-chair of the US-GCC Economic Dialogue. He is co-editor (with David Goldwyn) of Energy & Security: Toward a New Foreign Policy Strategy (Woodrow Wilson Center and Johns Hopkins University Press). This article is based on speeches delivered at the Wisconsin Academy of Sciences, Arts and Letters and the World Affairs Council of Northern California.
For all the talk about ending the “oil addiction” and specifically dependence on Middle East oil, the world maintains a growing need for both. Since the topics of energy and the Middle East are so fraught with ideology and emotion, it helps even more than usual to start with a few facts. Some of these may be inconvenient, but they are true and they must be reckoned with.
The first is that the world’s total annual energy consumption — oil, gas, coal, nuclear and renewables — has increased from 104 billion barrels of oil equivalent in 1970 to 192 billion barrels of oil equivalent in 2000, and is projected to increase to 338 billion barrels by 2030. It is the flip side of more people, more development, and more consumption: it can be managed but it cannot be stopped.
Second, of all these equivalent barrels, today oil and gas account for some 63 percent and coal for some 24 percent — and independent observers do not expect these percentages to diminish significantly by 2030, or for that matter by mid-century. Hopefully cleaner gas will be a bigger part of this mix, and thankfully there is more impetus for conservation and alternative fuels from the private sector, the individual states and other countries — one day perhaps Washington will catch up — but we will need oil and gas in substantial quantities for the foreseeable future.
Third, though Americans account for only 4 percent of the world’s population, we use 25 percent of the world’s oil — and 60 percent of that comes in imports from other countries. The United States is a disproportionate part of the problem — in energy consumption as in global warming— so we should be directing a lot of our advice to ourselves and discussing solutions with other countries with more humility than we normally display.
Fourth, the world has, does, and will continue to depend on the Middle East for over half its oil. That is hardly surprising since this region holds over half of the world’s energy reserves. But this dependence varies considerably — from a high of 82 percent of Japanese demand to 26 percent for Western Europe and 21 percent for the United States.
DEPENDENCE ON MIDDLE EAST OIL AND GAS
These figures point to the need for a much more thoughtful analysis of oil and gas supplies from the Middle East, rather than just a broad-brush treatment.
Surprising though it may sound, in some cases these supplies are actually a good thing. For example, Algeria and Qatar have supplied completely reliably large amounts of the gas needs of Europe and Asia, which means the latter in turn can depend less on such alternative suppliers as Russia. Gas disputes have upset relations between Russia and its neighbors, notably Ukraine, Belarus and Georgia, and persist between Russia and
the EU over monopoly control over exports and pipelines. We should encourage increased Russian oil and gas production and exports — and engagement in the global economy — but supplies from the Middle East help to mitigate the pressure that Russia can bring to bear.
In the case of oil, Saudi Arabia and other suppliers from the Arabian Gulf have provided uninterrupted exports for the past quarter century. Unquestionably they have benefited from increases in oil prices.
OPEC has moved recently to forestall price declines through agreed production cuts of 1.7 million barrels per day, but it is surging demand rather than OPEC action that accounts for a large part of the increases in the past two years. For its part, Saudi Arabia has repeatedly opposed moves by such hawks as Iran and Venezuela to sharply cut back production and
drive up prices. In fact, the opposite is the case: the Saudis have committed tens of billions of dollars to developing new oil and gas fields in the kingdom, and to building new export refineries both at home and abroad.
Long viewed as the central banker of oil, Saudi Arabia is the only oil supplier to maintain excess capacity of over one million barrels per day, with a plan to increase its daily production from 8.5 million barrels to 11.5 million barrels in the next few years, and potentially to 14 million or 15 million barrels per day longer term.
At this point, Russian oil production and exports are far less likely to challenge Saudi dominance, as Russian state companies concentrate more on control and less on investment. So we can actually expect Saudi Arabia to have the greatest single positive impact on energy security in the coming decade.
In other cases, though, dependence has quite negative effects. For example, China is undeterred by sanctions against Sudan, whose Arab militias have waged war amounting to genocide against its population in the south and the west. In fact, Chinese companies have negotiated lucrative exploration and production (E&P) and supply deals with the Sudanese government, and Beijing remains the weak link in peace initiatives from Darfur to the Horn. China will need to enjoy greater access to more stable markets — as is now occurring in Kazakhstan, for example
— before greater cooperation is likely with respect to more unstable areas.
Another important case is Iran, which supplies 4 percent of Europe’s oil and 10 percent of Japan’s, and earned about $51 billion from its energy exports in 2006.
While absence of new investment and growing domestic demand will threaten future exports, oil revenue still helps to support an extremist, clerical regime which subsidizes terrorist organizations and rejects the State of Israel. Thus far the revenue has insulated the regime from pressures to end its nuclear enrichment program which threatens to lead to an Iranian nuclear bomb — and Tehran uses energy access and supplies as well as a lucrative arms and nuclear trade to press other countries, particularly Russia, to oppose UN sanctions.
THE CASE OF IRAQ
So if Sudan and Iran are the black sheep of this tale, Saudi Arabia, Algeria, Qatar and other Middle East oil and gas producers should be recognized for the positive role they play in providing needed energy supplies to the global marketplace.
In limbo, of course, is Iraq. Second only to Saudi Arabia in conventional oil reserves, the country is torn apart by Sunni insurgents and Shia militias, and is moving further and further into civil war. When it makes a transition to a more peaceful future — as one day it must — Iraq will need every available barrel to raise the money required to reconstruct its economy and its society. As the Iraq Study Group noted last year, it is crucially important to use these resources for the benefit of the entire nation, rather than permit them to be diverted into regional treasuries or sectarian militias.
Energy companies from all over the world will want to partner with Iraq’s oil companies to make that more positive future possible. In turn, increased Iraqi exports, from today’s 2 million barrels per day to the 3 million that can be restored after the conflict — to the 3.5 million or more barrels after comprehensive well workovers and further exploration and production — will make a significant contribution to world energy supplies.
In the early days after the United States invaded Iraq, some hawks thought its oil could be used to displace Saudi oil. As is evident, they got their numbers wrong, just as they got wrong the consequences of military action for the United States and its allies — and for Iraq and the Middle East.
INTERDEPENDENCE AND DIVERSIFICATION
As we look at the specific cases of so-called energy “dependence,” the evidence tells us that some have positive effects, some negative, and in some cases the jury is out. What policies then should the United States follow based on this evidence?
The first is to avoid positions that are unrealistic. Exhibit A is that old chestnut favored by many politicians on both sides of the aisle: so-called “energy independence.” The last time the United States could be considered energy independent was 1949. Since then, our energy imports have increased, as our domestic production has leveled off.
Another regrettable example is President George W. Bush’s call, in his 2006 State of the Union address, to replace over 75 percent of U.S. oil imports from the Middle East by 2025 as part of a broader effort to end our “oil addiction.” Since the oil market is global, even success — dubious in any event — in achieving this without reducing consumption would simply redistribute dependence and have no impact on prices. And it would be a signal to reliable producers like Saudi Arabia and Qatar that the United States has no desire for them to carry out their plans for increased oil and gas production.
Fortunately, another course is available--energy interdependence, diversification, and risk reduction.
Energy interdependence is about building a relationship of mutual dependence between energy producers and energy consumers. In reality, producers continue to invest billions of dollars in consuming countries — particularly the United States — and both sides have a strong interest in a healthy global economy.
More specifically, consumers worry about security of supply; producers worry about security of demand. We can address both worries by increasing access and investment across the entire value chain — from upstream oil and gas fields to refining and transportation to downstream markets and developing widely-based joint ventures. Good examples of these are Saudi Arabia’s joint ventures in China and the United States, Kuwait’s in Europe, and planned combinations with Qatari national companies.
In turn, governments could support increased energy interdependence in several ways. They could pursue deeper dialogue through the International Energy Agency and the International Energy Forum to consider issues such as extending current information exchanges to expand access; responses to supply interruptions; and increased efficiency. They could make these key components of future energy security the centerpiece of a new producer-consumer covenant. And they could pursue new investment initiatives through the World Trade Organization to ensure increased access on a level global playing field — as opposed to the situation today, where international oil companies can count on access to less than 20 percent of the world’s reserves, with the remainder under the control of governments and national oil companies. While some national oil companies — Saudi Aramco is an excellent example — boast world class capabilities, in general it is the international oil companies that continue to add the most to the energy value chain through superior technology and management capabilities.
If interdependence is the first initiative for energy security, diversification is the second. Winston Churchill said, in 1913, that “Safety and certainty in oil lie in variety and variety alone.” While it is true that certain suppliers are more reliable than others, or their policies are more aligned with U.S. policies than others, their knowledge that the markets they supply have alternatives contributes to a more positive and balanced relationship. Thus it is a complete plus that the United States pursues supplies in non-OPEC countries — Australia, Azerbaijan, Canada, Kazakhstan and Russia, to name a few — at the same time as we maintain supplies from OPEC and the Middle East.
Last year, Chevron (which the author advises), together with Devon and Statoil, conducted a successful test at a well called Jack in ultra-deep waters in the U.S. Gulf of Mexico. Jack is a marker for a much larger geologic region that, if it proves out, could expand future U.S. resources by up to 50 percent, providing up to 15 billion barrels of oil in coming years. That, to be sure, will be a powerful contribution to U.S. energy security.
Diversification applies not only to wider access but to a wider range of energy sources. While oil and gas will continue to play a major role, we should press ahead with clean coal technology to take advantage of the huge reserves in the United States, China and other countries. We should pursue vigorously energy conservation and efficiency measures — the most abundant energy resource immediately available to us. We should develop alternative and renewable energy sources that can make a growing contribution over time. And we should move aggressively to reduce greenhouse gas emissions in the atmosphere. All these will contribute to U.S. energy — and environmental — security.
THE REDUCTION OF RISK
But since we will depend on the more conventional energy sources for a long time to come, we should also seek to reduce the risks we face in the producing countries. Energy traders attribute at least $10 per barrel to the so-called “risk premium” — the likelihood of strikes in Venezuela, strife in Nigeria, violent production halts in Iraq, and so forth. Reducing risks like these is important not only in its own right, but as a way to further increase our energy security.
One might well ask what the impact would be if one or another country — say an Iran or a Venezuela (as considered in a 2006 report from the Government Accountability Office) — tried to use the so-called “oil weapon” and cut off exports in retaliation against political pressures or sanctions. In the near term, such a cutoff would be disruptive and likely lead to higher oil prices. But then compensating steps would come into place: strategic petroleum reserves, Saudi spare capacity, and not least the damage that loss of oil revenues would wreak on the producer’s economy.
One cannot rule out cutoffs altogether— countries are quite capable of acting against their own interest — but it is no coincidence that almost none have been tried since the oil embargo of 1973. The exception of short-lived interruptions in Russian energy supplies to Belarus, Georgia and Ukraine proves the rule that cutoffs are both counterproductive and undesirable.
What is often overlooked, on the other hand, is the positive role that energy can play in promoting greater security in the world. Take the states of the former Soviet Union. By helping them develop and bring their oil and gas to the global market, Western governments and companies made a direct contribution to the political and economic independence of Azerbaijan and Kazakhstan from their neighbors to the north and the south.
The same is true in the Middle East. For example, Qatar has strengthened its independence and achieved wider influence through developing its massive gas resources in partnership with Western companies and in long-term supply agreements with major consumers around the world. One important reason for Libya’s decision to abandon its nuclear weapons capability was its increased access to Western investment, which is paying off in successive bidding rounds for new fields.
THE CASE OF IRAN
However, the international community faces a critical test with Iran. Despite a concerted effort to induce its rulers to abandon uranium enrichment, the preponderance of evidence is that they will continue to proceed — with the ultimate risk of acquiring a nuclear weapons capability and further destabilizing an already volatile region.
If Iran were to acquire a nuclear weapon, could Egypt, Saudi Arabia or Turkey be far behind? Last December, the Gulf Cooperation Council announced that it would move forward with a civil nuclear development program; although limited at this point to research and reactors under IAEA safeguards, it is a clear signal to Tehran that its nuclear steps will have consequences.
After months of debate, the UN Security Council has adopted limited sanctions on Iran, which ban the supply of nuclear-related technology and materials and impose a freeze on the assets of selected companies and individuals.
President Ahmadinejad rejected these sanctions as a “piece of torn paper” and, indeed, all indications are that Iran will proceed with installation of 3,000 enrichment centrifuges at Natanz (although significant doubt remains about its industrial capabilities). In that event, the hope is that Russia — which until now has insisted on more limited steps — will join in supporting a stronger set of sanctions against Iran’s nuclear program.
How should we view these sanctions? First of all, there is little point in imposing them unilaterally — they must be multilateral to be effective. Second, military action is very likely to be ineffective and simply lead to a backlash in the Middle East and in Iran, whose people ironically enough are more pro-American than anywhere else in the region, partly in response to the repressive policies of an unpopular government.
But other targeted, multilateral sanctions will likely be needed to impact the policies of the rulers. These are what are often called “smart” sanctions, such as a full asset freeze, prohibiting travel by high officials, suspending international transportation, and halting trade in a wider range of controllable and sensitive commodities such as gasoline, where Iran has a shortage.
Some have also called for Saudi production increases to diminish Iranian oil returns, or for cutting off the entire oil trade with Iran. The former, disavowed by Riyadh, would undermine its espousal of stability in the oil markets and contradict its opposition to Iranian threats to use oil as a weapon. The latter would be very hard to enforce even if it is internationally imposed— as was discovered with the embargo against Iraq under Saddam Hussein. Such “oil warfare,” if attempted, could prompt increased support of Hizbollah in Lebanon or Shiite militias in neighboring Iraq.
Removing Iran’s 3.5 million barrels of oil per day from the market could also trigger immediate increases in oil prices, which could be exacerbated by fear of further escalation.
In my view, we should pursue the targeted, smart sanctions, but we should leave no stone unturned on diplomacy as well. The IAEA’s director general, Mohamed El Baradei, asked at Davos for a “time out” in political posturing by all sides. Despite the failure of a similar EU effort last year, U.S. agreement to engage directly together with renewed efforts by the European Union may lead to a temporary suspension of uranium enrichment and more space to consider alternative proposals. Iran could gain significantly from economic and other incentives now on the table.
More broadly, could a new regional energy initiative that includes Iran help reverse the current downward spiral? Its elements could be support for, rather than opposition to, Iranian gas supplies to the Caucasus and South Asia; Caspian oil swaps with Iran; regional low-enrichment facilities in Russia or elsewhere outside Iran; and stringent safeguards over the Russian supplied nuclear reactor to remove its spent fuel from the country — in return for Iranian agreement to suspend enrichment activities and to cooperate on Caspian and Middle East issues.
This would require significant changes in U.S. as well as Iranian policy. Up to now, the United States has opposed Iranian gas supplies to the Caucasus and South Asia — despite the fact that Russia is charging top dollar for its gas supplies to Georgia while our two South Asian partners, India and Pakistan, are seeking out Iranian gas, and President Putin says Russia’s state gas company, Gazprom, is prepared to assist.
Up to now, the United States has opposed Caspian oil swaps with Iran, despite the fact that they no longer jeopardize the successful transit routes west to the Mediterranean or, prospectively, east to China.
Iran, for its part, still refuses to rely on Russian uranium enrichment outside its territory. But that might change as part of a global system of regional enrichment centers.
Up to now, Iran has been a spoiler in Russian efforts to secure multilateral agreement on delimiting the Caspian. The United States can and should support these efforts much more proactively, which could encourage greater Russian support vis-àvis Iran.
In seeking a solution to the Iran crisis, it will be necessary for the Bush administration to decide whether it seeks to reduce the nuclear risk or to change the regime in Iran. To do one is hard enough; to do both
is an invitation to disaster. The only hope for Iranian agreement to drop a nuclear weapons capability is if credible security assurances are provided in return.
In any event, the main chance for changing this odious regime is through domestic pressures of the kind again developing among Iranian students, who are demonstrating openly for an end to the repression. The United States and its partners can and should provide moral and political support for such change through engagement, rather than through military or other intervention, which will backfire anyway.
Instead of treating diplomacy as some sort of seal of approval — and very few approve of the truculent statements coming from Iran’s president — we should treat it as a way to pursue vigorously our interests with countries that disagree or are hostile to us. Notably, the Iraq Study Group has called for direct U.S.-Iranian talks; its co-chair and President George H.W. Bush’s secretary of state, James A. Baker III, has made the broader case for vigorous diplomacy with adversaries. Whether such talks are direct or go through third parties, energy can be at least a catalyst, if not a transformative element, of the overall equation.
DEMOCRACY AND TRANSPARENCY
In his September 2006 speech to the United Nations, President Bush called once again for a free and democratic Middle East. The administration’s democratization policy is the subject for another article. But the question does arise whether greater democracy in the region is likely to promote greater energy security. To be sure, there will be challenges — as in the case of opposition by conservative Islamists to foreign investment in Kuwait’s energy sector. But, in general, there is no contradiction between democratic and energy development. Oil and gas are produced just as readily by monarchies such as Saudi Arabia as by democracies such as Norway — and everywhere in between. And the excess production will be exported just as much by the Australians, Libyans and Venezuelans because they need the fruit of their resources.
Another factor — transparency — is more important for energy security. That is, are a country’s energy resources and production disclosed to its own people and to the international community? Are the cash flows linked to production and export clearly visible both at home and abroad?
To the extent they are, it will be likelier that a country’s resources are used for the right purposes, and that its income will be used for national development and not diverted to a corrupt few. That is why the British Government’s Extractive Industries Transparency Initiative — EITI — is so important and should be promoted with government and industry around the globe.
TOWARD ENERGY SECURITY IN THE MIDDLE EAST
So paradoxically, the “Rx” for so-called “oil addiction” is not to eliminate the role of oil and gas. They are here to stay for a long time to come. It is to place them firmly in a network of interdependence, to diversify their sources as well as alternatives, and to move proactively to reduce risk in unstable regions.
In turn, to seek to reduce energy dependence on the Middle East — with over one-half of the world’s oil and gas — is unrealistic. The wiser strategy is interdependence with our regional partners and a proactive strategy to reduce the risks in the region.
Beyond energy there is an equally fundamental issue, however, and that is the role of the United States in helping bring peace to the Middle East.
Since 2000, unfortunately, the United States has disengaged from efforts to promote peace between Israel and its Arab neighbors. The costs of that disengagement have only grown: Hamas took power in the West Bank and Gaza and Hizbollah’s attacks triggered a new and devastating war in Lebanon, in the absence of effective alternatives to military escalation by all sides. Meanwhile, U.S. power and influence have plummeted in the region.
The Lebanese ceasefire, renewed Israeli-Palestinian talks, and Syria’s declared interest in dialogue offer small openings. Secretary of State Rice has taken a positive step to reengage with Israelis and Palestinians. But the United States must reengage proactively, across the board, to restore a peace, however fragile, and hope for the future, however tenuous. That will help it regain the moral authority to turn to the wider regional tasks to the south and east of the Levant.