cera (2006) the new energy security paradigm

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W O R L D E C O N O M I C F O R U

M E

N E R G Y V I S I O N

U P D A T E

The New Energy Secur i ty Paradigm

World Economic Forum

in partnership withC ambridge Energy R esearch Associates

Spring 2006


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W O R L D E C O N O M I C F O R U M

About the World Economic ForumThe World Economic Forum is an independent international organization comm itted to improving the state of the world by engaging leaders in partnerships to shape global, regional and industry agendas.

Incorporated as a foundation in 1971, and based in G eneva, Switzerland, the World Economic Forum isimpartial and not-for-profit; it is tied to no political, partisan or national interests. (www.weforum.org)

About CERA C ambridge Energy R esearch Associates, Inc. (C ER A), an IH S company, is a leading advisor to energycompanies, governments, financial institutions, technology providers, and consumers. C ER A delivers criticalknowledge and independent objective analysis on energy markets, geopolitics, industry trends, and strategy.(www.cera.com)

C ER As expertise covers all major energy sectors oil and refined products, natural gas, coal, and electricpower on a global and regional basis. C ER As team of experts is headed by Daniel Yergin, C hairman, authorof The Prize: The Epic Quest for Oil, Money and Power for which he won the Pulitzer Prize , and author of TheCommanding Heights: The Battle for the World Economy . IH S is the leading source for the critical informationand data on which the upstream oil and gas industry operates worldwide. (www.ihs.com)

About the Energy Industry PartnershipThe Energy Industry P artnership (IP ) programme of the World Economic Forum provides the C EO s and seniorexecutives of the worlds leading companies as well as select Energy ministers with the opportunity to engagewith their peers to define and address critical industry issues throughout the year. Identifying, developing andacting upon these specific industry issues is fundamental to the Forums drive to deliver sustainable social

development founded upon economic progress.

World Economic Forum Energy Security AgendaSteering Board

Abdallah S. Jum'ah , P resident and C hief Executive O fficer, Saudi Aramco, Saudi ArabiaHelge Lund , P resident and C hief Executive O fficer, Statoil, N orwayClaude Mandil , Executive Director, International Energy Agency, P aris

The Energy Vision Update is published twice a year and provides in-depth analyses of energy issues identifiedby the Energy G overnors C ommunity of the World Economic Forum.


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Contents

3

Executive Summary 4

Energy Community Survey 6

Introduction 7

The Definition of Energy Security 9

The Evolution of Energy Security 11

Shifts in Global Oil Supply and Demand Patterns 12

The Dash to Natural Gas and the Effect on Electric Power 17

Emerging Energy Security Issues 22

Perspectives:

Geopolitical Transformations and the Shifting Energy Markets 21By Anoush Ehteshami and Sven Behrendt

Climate Change and Carbon Capture and Storage 23By David M . R einer and P aul Freund

A Perspective on Energy Security 25By Abdallah S. Jumah

From OPEC to OPIC 26By G ed Davis

Selected Scenarios from the World Economic Forums Scenarios Series: 28

China 28

India 31

Russia 34


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4 W O R L D E C O N O M I C F O R U M

Energy security has changed dramatically sincethe great oil supply disruptions of the 1970s and iscapturing headlines worldwide. After nearly twodecades of comfortable supply margins, theglobal energy system is now stretched to thebreaking point. T he recent R ussian-Ukrainiannatural gas dispute and oil disruptions elsewherehighlight the importance of the issue on thegeopolitical agenda.

What does energy security mean in a world inwhich financial markets, energy markets andcommunications are so closely linked? H istorically,energy security focused primarily on concernsabout oil disruption in the oil-producing world, withparticular focus on the M iddle East. T hat concernhas not abated, but has been joined by others.Today, news about any energy disruption electricpower black-outs in Europe or North America,political and social conflict in Latin A merica,hurricanes in the G ulf of M exico, terrorist activitiesin Iraq or threats such as a confrontation overIran' s nuclear programme moves around theglobe with lightning speed. T he impact isimmediate and felt by companies, suppliers,consumers and market traders and in the

balance of payments, revenues and governmentexpenditures.

T he latest technologies have been used to createmore complex, integrated systems that havesqueezed out inefficiencies and enabled nationsaround the world to access energy on demand.T his has been done in response to mark etpressures, government policies and technologicaladvance. B ut this level of integration andcomplexity has come with a price, demonstratedmost recently by the destruction from hurricanesK atrina and Rita in the US G ulf of M exico. O ilrefineries and oil and gas pipelines wereinoperable because the power lines that feedcritical electricity to them were damaged in thestorms. N atural gas flowed in from the G ulf of M exico but was then trapped at natural gasprocessing plants that were not able to function.T he first integrated energy crisis of the 21stcentury contributed to changing the way thatenergy security is viewed.

T he integrated energy industry in which a breakat any point in the supply chain can reverberatethroughout the system is not the only change inthe definition of energy security. O il producersview energy security in terms of predictablerevenues to feed growing economies. Developing

countries seek price stability to maintain fragileeconomies and avoid balance of payments crises.C limate change concerns influence decisionsregarding new investments. N o region or energyinfrastructure is totally immune from new terrorismrisks.

The New Energy Security Paradigm is the firstsemi-annual Energy Vision Update for members of the World Economic Forums Energy IndustryP artnership (IP ). We chose the issue of energysecurity because it is the central theme for a widerange of concerns for the energy industry.R esponses to the Interest P oll sent to IP membersover the summer of 2005 identified five areas of concern all closely aligned with energy securitythat demand action and on which there is a highlevel of uncertainty in both the short and long term(see Box 2).

After three decades, it is time to revisit the energysecurity paradigm of the 1970s. T he potential forglobal terrorism focused on energy supplysystems was not a consideration in the mid-1970s; climate change regulations were not onthe agenda. When the International EnergyAgency (IEA ) was established as a result of the1973/74 oil crisis, the key energy demand centresin the world were all members of the O rganizationof Economic C ooperation and D evelopment(O EC D). Today, C hina, India, B razil and otherdeveloping countries already account for anincreasing share of the demand for energy andthis demand will continue to rise. G lobal demandfor natural gas was less than 40 trillion cubic feet(tcf) in 1974. Today, thanks to the introduction of combined cycle gas turbines into the electricpower sector and increased use of natural gas forhome heating, natural gas demand globally isnearly 90 tcf.

T he five traditional elements of energy security demand centres, supply sources, geopolitics,market structures and institutions have allchanged over the past 30 years. So hastechnology. The ten principles listed in B ox 1,which resonate for both producers andconsumers, can help provide solutions to thelong-term concerns about energy security.

In The New Energy Security Paradigm , the WorldEconomic Forum and C ambridge EnergyR esearch Associates explore and analyze thechanges that have occurred since the oil crises of the 1970s changes that require a fresh look atthis issue. Four critical sets of questions emerge.

Executive Summary


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C hristoph Frei, Director,Energy Industry & Strategy,World Economic Forum

D aniel Yergin, C hairman,C ambridge EnergyR esearch A ssociates

E N E R G Y V I S I O N U P D A T E

Signals that might reduce or slow demandgrowth. C onservation has moved to the fore inenergy policy discussions once again.H istorically, price signals have triggered a newround of new energy supplies and energyefficiency gains to bring supply/demand back inbalance. What are the possible signals forreducing or modulating energy demand? Willthe price signal suffice? Is there a requirementfor signals from governments? Will prices spike or collapse?

Integration challenges. G lobalization has

enhanced the drive toward integration of multiple systems to squeeze out inefficiencies.In some cases, the integration is physical, withinterconnections all along the supply chain. Inthat case, physical security becomes critical.But integration also creates new vulnerabilitiesin a broader sense because a break anywherein the system whether the links are financial,physical or communication can cripple largesegments of an economy. Exposure toincreased rates of natural disasters andpotential terrorist attack s underline thesevulnerabilities. How can societies takeadvantage of integration while also protectingagainst its risks?

Institutional and market structural change.The IEA was created to share the burden of asupply disruption in the M iddle East. Will thecurrent wave of energy security concerns fosternew arrangements and institutions? Willgovernments shift away from reliance on energymarkets and recapture the commandingheights? H ow can other countries C hina,India and R ussia be integrated into thesystem? What are the opportunities forenhanced cooperation between consumers andproducers?

We look forward to meaningful dialogue about thebest way forward. We hope that energy suppliers,energy producers, policy-mak ers and consumerscan join together to shape a new energy securityparadigm that addresses the realities of the 21stcentury and respond to all stakeholder needs in acooperative fashion.

T hese questions will be the focus of the EnergyIndustry P artnership meetings in the monthsahead.

Signals that might increase supply.G overnment policy clarity sets the frameworkfor energy industry investment. There iscurrently a lack of government policy clarity ona wide range of issues, including climatechange, rent-sharing, stability of contracts,environmental and social impact requirements.Will new national policies or international

agreements emerge that reduce the risk of newinvestments?

Executive Summary

Box 1 Ten Key Principles of Energy Security

Diversification of energy supply sources is thestarting point for energy security.

T here is only one oil market. A security margin consisting of spare capacity,

emergency stocks and redundancy in criticalinfrastructure is important.

R elying on flexible markets and avoiding thetemptation to micromanage them can facilitatespeedy adjustment and minimize long-termdamage.

Understand the importance of mutualinterdependence among companies andgovernments at all levels.

Foster relationships between suppliers andconsumers in recognition of mutualinterdependence.

C reate a proactive physical security frameworkthat involves both producers and consumers.

P rovide good quality information to the publicbefore, during and after a problem occurs.

Invest regularly in technological change withinthe industry.

C ommit to research, development andinnovation for longer-term energy balance andtransitions.

Source: Daniel Yergin, Energy Security and M arkets,Energy and Security: Toward a New Foreign Policy Strategy , Jan H. K alicki and David L. G oldwyn, eds.(Woodrow Wilson Press, co-publisher JohnsHopkins University P ress, 2005)

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Key Issues for the Energy Industry The key issues selected and their priority arebased on a survey conducted with 60 C EO s of global energy companies, 32 of whom (53% )responded.

The Issue Map ExplainedK ey issues are positioned according to threeparameters: The horizontal axis indicates how large an

impact the issue is expected to have on theenergy sector.

The vertical axis indicates the degree of uncertainty surrounding an issue.

The size of the bubble indicates distance intime to when the issue becomes pressing.Immediate concerns are shown by largerbubbles, while small bubbles indicate issuesthat will become important only in the longerterm.

How to Read the Issue Map High impact/low uncertainty issues require

immediate action by industry associations,political decision-makers, etc.

High impact/high uncertainty issues wouldbenefit from multistakeholder dialogue.

Low impact issues are either consideredunimportant or they have not yet registered onC EO s radar screens. Where the surveyreveals sharp differences over the impact of an issue the second interpretation is morelikely, in which case the World EconomicForum may seek to raise awareness.

Setting the Agenda: Issues that lay on theupper right corner of the Issue M ap define theAgenda of the Energy G overnors. This agendais balanced with respect to short-term andlong-term issues.

Most Urgent IssuesC EO s consider energy security, climate changeand the longer-term energy supply as thehighest-ranking issues. M ore specifically, in thecontext of energy security uncertainty oversupply from the M iddle East ranks as top issue(as already in the previous year survey). Newforms of terrorism clearly have gained on the listof concerns and now rank top. O n the otherend, the urgency of energy security relatedissues has outranked more society andsustainability related concerns such as energy

poverty, diversity or biofuels. C orruption hasmaintained its position.


Energy Community Survey

Box 2 Energy Issue Map 2005/06

Source: World Economic Forum, Energy Industry P artnership Programme 2005


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E N E R G Y V I S I O N U P D A T E 7

Introduction

Energy security has risen to the top of thepolitical agenda again. It is at the forefront of national debates and G -7 discussions and isslated to be at the top of the list for the G-8Summit in 2006. It is also of great significancefor developing countries, emerging economies,and energy exporters. B ut what does energysecurity mean in the 21st century? T hetraditional areas of concern supply sources,demand centres, geopolitics, market structures

and responsiveness of related institutions formthe core of discussions about the best way toensure that economies have sufficient energy tomeet their needs. However, the energy securityparadigm has shifted and become larger sincethe major supply disruptions of the 1970s andeven the early 1990s. T he risks are different, theconsiderations for the best response havechanged, and the implications for solutions arefar more complex. The 1970s model is no longersufficient and a more expanded concept nowseems necessary.

Some issues remain the same. R egional andsocial turmoil still unsettles key producing areas.H owever, global terrorism threatens the entiresupply system. Iraqs production is moreconstrained than many anticipated before theIraq War, and it remains vulnerable to sabotageand terrorism. T here is growing concern thatrising tensions over Irans nuclear programmecould lead to a new oil disruption. 1

The risks are hardly limited to the M iddle East. Inthe past few years, political conicts havedisrupted signicant amounts of oil supplies faraeld from the Persian G ulf in Nigeria andVenezuela, both major producers. Indeed, the2002-2003 interruption of exports fromVenezuela, considered a most reliable suppliersince World War II, removed more oil from theworld market than the cessation of Iraqi suppliesdid during the 2003 war. T he hurricanes in theG ulf of M exico in 2005 mean that consumers inthe United S tates see the new risks in terms of higher and more volatile prices both at thegasoline pump and in their home heating bills.

C hina, with its oil imports rising rapidly and

confronting what it sees as its own energycrisis, is seeking a new denition for its energysecurity that goes beyond its traditional policy of self-sufficiency. Accelerating oil demand in 2004and 2005 pushed up prices and strained theglobal supply system, adding to thevulnerabilities. C oncerns persist that if the energydemand nerve continues to be hit, a potentialslowdown in global economic growth may follow.

The issue of energy security is certainly notrestricted to oil. T he electric power blackout thatstruck the US Northeast in August 2003, and thepower cuts that occurred in Europe and inM oscow, demonstrated the vulnerability of complex transmission systems. H igh natural gasprices in the United States are evidence of atightly-balanced gas market that leavesconsumers vulnerable to supply disruptions orweather-driven increases in demand. This tightmarket is driving the United States towardintegration with an emerging global gas market,which, while bringing in needed new supplies,

will add to the energy security agenda.

Twin HurricanesThe theme of integration was driven home duringand in the aftermath of the twin hurricanes thatravaged the G ulf of M exico in 2005. With theoverall energy system stretched to its limits, thecritical physical connections between gas andpower, and oil refineries and power, and betweenpipeline distribution systems and power, led tothe first integrated energy crisis of the 21stcentury. Indeed, the very concept of energy

security is taking on wider dimensions. N olonger does it mainly encompass just the ow of oil, as central as that is, and as it has been formore than three decades. It now extends to theentire infrastructure of energy supply thatsupports the global economy offshoreplatforms, pipelines, oil tankers, long-distancenatural gas pipelines, liquefied natural gas (LN G )tankers as well as reneries, storage, generatingfacilities, transmission lines and distributionsystems. T his vast network was designed formajor storms, but not storms of the magnitudeseen in 2005. T he network was also not

The New Energy Security Paradigm

1 See D aniel Yergin, Energy Security and M arkets, Energy and Security: Toward a New Foreign Policy Strategy , Jan H. K alicki and DavidL. G oldwyn, eds. (Woodrow Wilson P ress, co-publisher Johns H opkins University P ress, 2005).


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Box 3 Energy Security: An Umbrella Term

Source: C ambridge Energy R esearch Associates



designed with terrorism in mind. But industrystructures and operations will now need to bedesigned and managed with those continuingdangers in view. T he result is to create new andcomplex responsibilities for both industry andgovernment, including communication andcoordination between them. There is still muchto be learned and done in this arena.

Energy ShocksYet less visible, and every bit as important as therisks, is a compensating reality. New sources of oil and gas, and technological advances both forenergy production and for consumption andthe lessons learned and the institutionaldevelopment that has come with those lessons give policymakers the capability to manageenergy shocks and to weather disasters,whether natural or man-made, that may lieahead. R elations between producing andconsuming countries are generally based muchmore on interdependence and cooperation thanin the past, although new conicts continue toerupt. Still, these more cooperative relationsprovide a crucial foundation for handling and

minimizing shocks. In the longer term, a renewedcommitment to new technologies and energyresearch and development holds the promise of further diversication, although neither the timingnor the certainty is as sure as some may wish.At the very least, the realities the huge scale of the energy supply system, the inevitable timelags and the requirements for commercial proof delay the major impact of alternatives one ortwo decades. In other words, energy securityrequires continuing commitment and attention today and tomorrow.

In this Energy Vision Update, C ambridge EnergyR esearch Associates (C ER A) and the WorldEconomic Forum seek to respond to the urgentneed to establish the foundation for discussionsabout the new, emerging energy securityparadigm, and the implications for oil, gas andpower around the world.


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The Definition of Energy Security

Energy security is an umbrella term that coversmany concerns linking energy, economic growth andpolitical power (see B ox 3). The energy securityperspective varies depending upon ones position inthe value chain. C onsumers and energy-intensiveindustries desire reasonably-priced energy ondemand and worry about disruptions. M ajor oil-producing countries consider security of revenueand of demand integral parts of any energy securitydiscussion. O il and gas companies consider access

to new reserves, ability to develop newinfrastructure, and stable investment regimes to becritical to ensuring energy security. Developingcountries are concerned about the ability to pay forresources to drive their economies and fear balanceof payment shocks. P ower companies areconcerned with the integrity of the entire network.P olicymakers focus on the risks of supply disruptionand the security of infrastructure due to terrorism,war or natural disaster. They also consider thevolumes of security margins the amount of excesscapacity, strategic reserves, and infrastructureredundancy. Throughout the value chain, prices andsupply diversity are critical components of energysecurity. In earlier periods, oil was used as aweapon, and there is concern that natural gascould also be used to gain political leverage at sometime in the future.

The traditional elements of energy security includesupply sources, demand centres, geopolitics andmarket structures (and responsiveness of relatedinstitutions). In the energy crises of the 1970s, theprimary focus for the Western industrial countrieswas on oil supply sources and geopolitics. T hese

two elements were the underlying causes of energysecurity concerns, and the demand centres, marketstructures and new institutions created the solutionsto the two energy crises that occurred. In fact, thecreation of the International Energy Agency (IEA) wasa direct response to the 1973-74 oil disruption bythe then-dominant energy-consuming economies(see box 4).

The implications for addressing energy securityconcerns loom large. T hree oil price spikes over thepast 35 years have helped to precipitate global

economic slowdowns (see Box 5).



Box 5 Oil Price Spikes and Global Economic Growth

Source: International M onetary Fund, C ambridge Energy R esearch Associates

Box 4 The International Energy Agency andIts Role in Energy Security

The IEA was founded during the 1973-74 oil crisis that wasprecipitated by the 1973 Arab-Israeli War and the oilembargo. The initial purpose of the IEA, established bymembers of the O rganization for Economic Cooperation andDevelopment (O EC D), was to coordinate activities during oilsupply emergencies. T he 26 member countries of the IEAare Australia, Austria, Belgium, C anada, C zech Republic,Denmark, Finland, France, G ermany, G reece, H ungary,Ireland, Italy, Japan, K orea, Luxembourg, the Netherlands,New Zealand, N orway, P ortugal, Spain, Sweden,Switzerland, Turkey, United Kingdom and the United States.P oland and Slovakia have applied for IEA membership, andthe European C ommission also participates in IEA activities.Notably, C hina, India and R ussia are not currently part of theIEA system.

IEA member countries are required to hold oil stocks thatcan be shared in case of an oil supply emergency. Thesestocks fall into three categories: company stocks,government stocks and agency stocks; the total volume of these three categories is approximately 4.1 billion barrels.C ompany stocks are both mandatory and commercial, andrepresent about two-thirds of total IEA stocks. G overnmentstocks are financed by national governments and are heldexclusively for emergency purposes. A dditional agencystocks are maintained by a combination of public and privateorganizations.

An emergency response team has been activated four times:during the 1991 G ulf War when a supply shortfall of 4.3million barrels a day (mbd) occurred at one point, during themillennium (Y 2K ) when there were concerns that computersystems might fail as we moved from 1999 to 2000, duringthe Venezuelan shutdown at the end of 2002 and thebeginning of 2003, and most recently in response to the lossof oil supplies in the G ulf of M exico due to H urricane Katrina.The only actual release of emergency stocks occurred twice during the 1990-91 G ulf crisis and in the immediateaftermath of H urricane K atrina in late 2005.

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O ver the past 30 years, the characteristics of each of these four energy security elements supply sources, demand centres, geopolitics andmarket structures have changed, and newelements have emerged. The current focus onenergy security began with a disruption inVenezuela in 2002 and then the Iraq war in2003. T hat focus was much amplified by ademand shock created both by rapid Asianeconomic growth and by the best globaleconomic performance in a generation. Whenthe anticipated incremental supply from Iraq didnot materialize, the global oil supply system wasstretched to its limits, its flexibility limited bysophisticated integration that had squeezed outany inefficiencies. T he crisis was thencompounded by supply disruptions, includingthe natural disaster caused by hurricanes Katrinaand Rita in the G ulf of M exico.

Any solutions to the current energy crisis andto long-term concerns about energy security need to integrate these changes and the newelements. T hey should also incorporate the tenkey principles of energy security (see Box 1).



Box 6 Oil Intensity of the Global Economy

Source: C ambridge Energy R esearch Associates, International M onetary Fund

Structural and technological responses canreshape the competitive environment fortraditional players and stimulate new industries.At the same time, producers need to makedecisions based on estimates of demand in thefuture.

After the second oil price shock of the 1970s,the oil intensity of the global economy declinedfrom 1.8 barrels of oil consumed per U S$ 1,000of economic output, down to less than 1.2barrels of oil and has continued to fall (see Box6). Automobile manufacturers that producedsmaller, more efficient vehicles quickly gainedmarket share.

R egulatory and institutional responses to energycrises, on the other hand, can freeze solutionsthat are difficult to unravel decades later. In theUnited States the Securities and ExchangeC ommissions methodology for calculating oilreserves was, in part, a response to a lack of information on the quantity of U S oil reservesavailable. Yet, three decades later, afterextraordinary changes in the technology to

explore and develop oil reserves, thatmethodology based on 1970s technology persists. 2

2 C ERA Reports, In Search of Reasonable Certainty: Oil and Gas Reserves Disclosure and Modernizing Oil and Gas Reserves Disclosures


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E N E R G Y V I S I O N U P D A T E 11

The Evolution of Energy Security

Energy security issues have traditionally focusedon crude oil supply disruptions in the M iddleEast. T he instability of the M iddle East during the1970s led to rising prices for more than adecade. After oil prices collapsed in the mid-1980s, followed by the end of the C old War andthe resolution of the 1990-91 crisis, the worldpassed into a decade of lower oil prices andovercondence about energy security and,indeed, security overall. B ut turmoil in the M iddle

East accentuated by demographic pressures,generational change and the rise of extremism;by the threat to political order and infrastructureposed by terrorist organizations; by regionalconict; and by rising demand, market pressureand price spikes all these have brought theissue centre stage again (see Box 7).

Yet, over the past 30 years, all four elements of traditional energy security discussions haveevolved. O il and natural gas production occurstoday in locations not anticipated 30 years ago.

The expansion of the European Union, thebreak-up of the Soviet Union and the economicexplosion in the Asia Pacific region have meantmajor shifts in demand and supply and ingeopolitics. Terrorist acts by small groups thatare more concerned about disrupting economiesthan on controlling oil were not a consideration inthe past. N ow, every government must factor inthe possibility of terrorist acts that could disruptsome part of the supply chain or systems thatsupport the energy supply chain, includingtelecommunications.

In the 1990s, natural gas became the fuel of choice for new power generating plants. Bothglobalization and the Internet revolution havealso created interconnections in the supply chainthat squeeze out inefficiencies and yet createnew vulnerabilities for disruption.

In this section of the report, we explore the majorshifts in the world of energy between 1974 and2005, beginning with oil the original focus of energy security.


Box 7 Crude Oil Prices in Nominal and Real US Dollars, 19702005



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Shifts in Global Oil Supply and DemandPatterns

N ine times in the past 50 years global oil mark etshave experienced supply disruptions of at least 2.0mbd. The most severe, in terms of gross supplyloss at its peak, was during the Iranian R evolution.That disruption lasted around six months, fromN ovember 1978 until April 1979, and caused thethen-largest crude oil price increase, until the mostrecent price run-up in late 2005. In comparison, themaximum crude oil disruption from H urricanes

K atrina and R ita reached 1.5 mbd. There was anadditional natural gas disruption equal to 1.6 mbd(9.5 billion cubic feet a day) at the peak of the crisis.G ulf of M exico refining capacity losses rose to 4.0mbd during the height of the crisis (see Box 8).

The recent disruptions have intensified concernsabout the declining rate of oil discoveries (see Box9). O ver the past 40 years, the volumes of oilresources classified as discoveries have exhibited adownward trend. However, the traditional way of measuring discovery rates can be misleading andunderestimate the total oil resources available forexploitation, or recovery. D iscoveries are normallyrecorded when the initial contact, via wellbore, ismade in a field previously unexploited. The Canadianoil sands, for example, were well-known to theindigenous people or First Nations many centuriesago, and were discovered by European traders inthe 1700s. However, they are not reflected in currentdiscovery statistics because they do not meet thetechnical definition. Yet, in recent years, technologyhas made oil sands competitive so that they now

represent approximately 174 billion barrels of recoverable oil reserves (according to C anadiangovernment estimates). In addition, recoverableresource estimates continue to be revised andtend to increase over time. It should be noted thatthese revisions are also not reflected in the discoverystatistics, as they are not technically discoveries butadditions, leading to a sense that oil resources areless than they actually are. The changes inrecoverable resource estimates come from threesources.

Additions and revisions. T here is an increase inthe estimate of recoverable in-place resources asthe characteristics of the field become betterknown.

Box 8 Global Oil Supply Disruptions

* Natural gas measured in millions of barrels of oil equivalent.

N ote: M agnitude of supply shortfall is the peak gross supplyloss excluding increases of other oil-producingcountries. T he IEA calculation uses a trigger of 7%net loss of available IEA supplies. A verage dailysupply loss over the disruption period is lower thanthe gross peak supply loss.

Sources: International Energy Agency. US MineralsM anagement Service, and C ambridge EnergyR esearch A ssociates

Box 9 Annual Liquids Discovered versus Annual Liquids Production

Source: C ambridge Energy R esearch Associates, IH S

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Improved technology. Drilling,seismic, reservoir modeling, and othertechnologies enable the operator toidentify and extract more oil thanoriginally envisioned.

Commodity price. H igher oil pricesprovide the incentives for newinvestments in enhanced oil recovery,infill drilling and other developmentactivities that can squeeze outincremental volumes.

Box 10 illustrates the impact of combining these post-discovery activitieswith new discoveries. C ER A estimatesthat total productive capacity will keeppace with demand until around 2015. Butthe challenge of delivering enough oil tomeet demand should not be minimized.

O il production from O P EC member statesaccounted for 54% of global oilproduction in 1974. It fell to a 30% low in1985, and currently stands at around

40% . In terms of oil production capacity,15 countries dominate the future growthin long-term oil supplies (see Box 11).

This growing concentration is occurringat the same time that competition forthese resources has become moreintense. N ational oil companies have

joined international oil companies incompeting for resources to feedeconomies. D eveloping the oil reserveswill require new infrastructure to refine the

oil and deliver products to market.

C hanges are under way in oil demand aswell. T he IEA was established by O EC Dcountries. In 1974, O EC D countriesaccounted for 70% of global oil demand.Today, the O EC D countries have been

joined by strong growth in C hina, Brazil,East Asia and South Asia. A s a result,O EC D countries today represent just60% of global oil demand.

13E N E R G Y V I S I O N U P D A T E

Source: C ambridge Energy R esearch Associates. *O P EC member

Box 11 STRUCTURAL CHANGE

Oil Production Capacity Increases:15 Countries Dominate Long-term Oil Supply Growth

(million barrels per day of production capacity)


50% 54% 58%

2 Russia 6.2 9.5 11.3

3 Iran* 3.7 4.2 5.2

4 Iraq* 2.1 2.3 4.0

5 Canada 2.4 3.5 5.3

6 Venezuela* 3.0 2.9 3.4

7 UAE* 2.3 2.9 3.5

8 Kuwait* 1.6 2.5 3.2

9 Nigeria* 2.1 2.9 3.7

10 Kazakhstan 0.4 1.2 3.3

11 Algeria* 1.4 2.2 3.1

12 Libya* 1.5 1.8 2.6

13 Brazil 0.8 1.8 2.7

14 Angola 0.6 1.3 2.5

15 Azerbaijan 0.2 0.4 1.1

Total Top15 35.9 47.0 62.8

1 10.2 11.1 13.2

Rank Country 1995 2005 2015

Share of World LiquidCapacity

Saudi Arabia*

Box 10 Capacity Additions Outpace ExpectedDemand by Narrow Margin



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Looking ahead, we can anticipate that nearly half of global oil demand growth over the next tenyears will occur in the Asia P acific (see Box 12).Both the supply sources and the demandcentres for oil are shifting, with direct implicationsfor energy security issues. O nly Japan, forexample, of many Asian countries, is included inthe IEA agreements. Yet, the oil demand growthwill be focused in C hina and India. C ountries inLatin America, the M iddle East and Africa areoutside the IEA umbrella. A ll of them will seesubstantial growth in oil demand over the nextdecade.


Box 12 Changes in World Refined Product Demand by Region, 2005 to 2015

Source: C ambridge Energy Research Associates


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15



Box 13 World Natural Gas Production


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Box 14 World Natural Gas Consumption


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3 1,226.6 billion cubic metres or 118.6 billion cubic feet per day.


Box 15 Sizing UpLNG versus Gas:Global Natural Gas Demand and LNG's Share


C onstruction of the Baku-Tbilisi-C eyhan (BTC ) pipeline, Rustavi,R epublic of Georgia, June 2004

The Dash to Natural Gas andthe Effect on Electric Power

The changes are not limited to oil. The natural gas

story is even more remarkable. In 1973, total worldnatural gas production was approximately 43.3trillion cubic feet. 3 There was minimal natural gasproduction in Africa, N orway, the Asia P acific andthe M iddle East. The Caspian region was largelyundeveloped in terms of natural gas. Today, all of these regions are teeming with natural gasexploration and production projects, and demandhas more than doubled (see Boxes 13 and 14).

The dash for gas is in large part a result of naturalgas becoming the fuel of choice for new powergeneration globally. Increasingly, long-distancepipelines crisscross borders, linking economies butalso creating vulnerabilities for terrorist activities. Inaddition, as gas demand centres are decoupledfrom production sources, the need has increased forLN G that provides more supply flexibility than point-to-point pipelines. C ER A anticipates that LN G willhave 17% of the global market by 2020, up from 7%in 2003. O ver that same period, C ER A estimatesthat total natural gas demand will have also grownfrom 262.7 bcfd to 369.4 bcfd (see Box 15). Thepush to be able to deliver natural gas by bothpipelines and LN G tankers adds to the complexity of

energy security. The high seas will carry more LN Gtankers along with oil tankers.



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Box 16 Annual Gas Discovered versus Annual Gas Production


Box 17 Annual Gas Resource Additions in 2004versus 2004 Annual Production


G lobal natural gas demand more than doubled in thepast 30 years, driven largely by new technology. Themost remarkable growth, in terms of volumes, hasoccurred in the Asia-P acific, the Former Soviet Union(FSU), Europe and the M iddle East.

Expectations of strong growth in natural gas demandhave led to a push to develop previously discoverednatural gas reserves and search for new sources aswell. A nnual additions to natural gas resources haveremained above production rates throughout most of the past 45 years (see Box 16). Also, many of thefields that have been discovered have not beendeveloped because they lack a market. O ne of theattractions of the growing LN G trade is to enable thedevelopment of those fields, often referred to asstranded gas.

All of the caveats related to oil discovery statisticsapply equally to natural gas discoveries. T hreereasons account for most changes in resourceestimates.

Additions and revisions. There is an increasein in-place resources as the characteristics of the field become better known.

Improved technology. Applying digital andother technology, including the ability to capturenatural gas that was previously flared, enablesthe operator to identify, extract, and deliver morenatural gas than original envisaged.

Commodity price. H igher natural gas pricesprovide the incentives for new investments in, forexample, infill drilling that accesses more of theresource.


Aftermath of Hurricane Denis, G ulf of M exico, July 2005

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When the resource growth in pre-2004discoveries are added to new-field discoveries,the annual replacement of natural gas resourceswas twice the rate of gas production in 2004(see Box 17).

Natural gas demand The growth of natural gas demand in the UnitedStates offers an illustration of the significance of policy changes combined with new technology.In the United S tates, the 1978 Power plant and

Industrial Fuel Use Act (FU A) restrictedconstruction of new power plants that usedeither oil or natural gas as a primary fuel. Thiswas in response to two perceived energy crises:oil disruptions in the M iddle East and reducedsupplies of domestic natural gas. Both criseswere exacerbated, in large part, by pricecontrols. With the end of natural gas pricecontrols in the mid-1980s, new domestic naturalgas exploration and production efforts resulted instable long-term prices. In addition, thedevelopment of combined-cycle gas turbinetechnology offered a new generation of energy-efficient power production. When the FUA wasrepealed in 1987, the stage was set for adramatic increase in natural gas consumption forelectric power generation.

In fact, over the past ten years, between 1995and 2005, the US power sector has added 252gigawatts of natural gas-fired capacity, outpacingany other form of new electric power.

Economic growth and development are drivingpower demand around the world. This is

occurring during a time when power marketsreflect many of the same issues as oil and gasmarkets (see Box 18).

Box 18 Index of Per Capita Power Consumptionby World Region, 1990-2004


Box 17 Annual Gas Resource Additions in 2004versus 2004 Annual Production


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M arkets are shifting between state-ownershipor regulatory-controlled markets andderegulated, commercially-based structures.C ombined with continued globalization, thereis a possibility that the pendulum may swingback toward greater state control for powermarkets as well as oil and gas markets if markets are perceived to be insufficientlyreliable.

Some government officials are increasinglyviewing energy markets oil, gas, and power as the commanding heights withimplications for how control, markets,investments and energy security areperceived. This will have spillover effects onhow both governments and corporationsrespond to any energy crisis.

Local communities have become more vocalabout the impact of any new development ontheir neighbourhoods, affecting the ability tobuild new infrastructure in a timely manner.


C limate change concerns influence thechoices that companies make in terms of newenergy sources. T hey also affect the emergingpolicies of governments that are jugglingbudgets, economic growth, social andenvironmental concerns, competitive concernsand interest in developing new technologies.

The world economy and energy markets aremore closely linked than 30 years ago oreven five years ago. The recent supplydisruption in 2005 in the Gulf of M exico wasfelt in Europe, Latin America, and throughoutthe M iddle East, Asia and Africa. S imilarly,financial flows are closely linked and anyslowdown in one economy would put alleconomies at risk. G as prices in NorthAmerica, Europe and Asia will to a degreeunanticipated just a few years ago increasinglyinfluence each other through LN G .

O il and gas pipelines: from producers to consumers


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Box 19 Perspective: Geopolitical Transformations and the Shifting Energy Markets

By Anoush Ehteshami, Head, School of G overnment and International Affairs, University of Durham, United K ingdom,and Sven Behrendt, Senior P roject M anager, G lobal R isk Network, World Economic Forum

T he geopolitical landscape has changed profoundly in the past 15 years. U ntil the end of the C old War and the fall of theBerlin wall, international politics was dominated by the struggle of the two super-powers, the U S and the USSR , for globaldominance. With the end of the East-West conflict and the demise of the Soviet U nion, the world anticipated that the West,led by the U S, would largely dominate global politics.

M ore than a decade later, the United S tates maintains its economic and military superiority. H owever, it seems that the worldis heading towards a fundamental reshuffle of the global balance of power with new powers emerging, their ascendancefuelled by rapid economic growth. T heir rise will inevitably contribute to shaping global order: new alliances will emerge thatwill reflect interests that may be fundamentally different to those that have dominated international politics in the pastdecades. M anaging this global transformation and securing global stability are two of the biggest challenges facing theinternational political system.

Yet, it is uncertain what form of global order will emerge from this great transformation we are witnessing today. T he keydrivers of this new order will be the distribution of military power in the global system, converging and diverging politicalinterests, the economic potential of current and emerging powers and cultural influence.

T he combination of these drivers and the superiority of each one of them will feature alternative forms of alliances. A ssumingthat the US retains its military and economic superiority, current and emerging powers Europe, C hina, India and R ussia might revolve in shifting alliances around the US lik e a five on a dice . If power is fragmented throughout the globalsystem, the geopolitical environment might be determined by opportunistic ad-hoc alliances among global powers. In aworld that is culturally fragmented, Europe has the potential to become the central hub for global policy coordination andalliance-building, based on the cultural proximity of individual European countries to all parts of the world. A fourthscenario assumes that emerging powers engage more actively in building new alliances among themselves, based on theirgr

No matter how this transformation plays out, it will have tremendous consequences for how global oil and gas supply and

owing global ambitions.

demand is structured. O nly a few years ago, oil and gas exports originated mainly from the M iddle East and weretransported to the trans-Atlantic area; today, both supply and demand are much more diversified. R ussia, C entral Asia, WestAfrica and parts of Latin A merica have also become significant hydrocarbons suppliers. T he economic rise of countries inAsia, especially India and C hina, have diversified the demand structure for energy supplies.

T his transformation will have a direct impact on both sides of the demand and supply equation. It will increase the bargainingpower of the suppliers as they find hungry new customers for their processed and unprocessed hydrocarbon resources. Butat the same time, consumers will for the first time in decades, have the opportunity to negotiate alternative deals with anumber of suppliers that operate outside of the O P EC -pricing mechanism or be able to exploit upstream and downstreaminvestment opportunities presented by the NO P EC producers. T hus, while the hydrocarbons market as a whole maybecome more volatile in the coming years as a consequence of geopolitical and economic realities of the post-C old Warglobalized international order, new opportunities will also emerge as the structure of the hydrocarbons market itself changes.T here is, therefore, a real need to manage the changing energy market as the international balance of power itself shifts.

Global Order Pre-1989 [or post-oil shock 1973 and 1979], Today, and Outlook for 2020

Pre-1989 Cold War Period Today Towards 2020

Bipolar World

Based on divergent ideologies andmilitary balance of power, bipolarcompetition for global influence

Intervening Time

No clear pattern of global orderrecognizable. Future alliances willbe based on military balance of power, political interests,economic potential and culturalinfluence

Global alliances determinegeopolitical agenda in 2020

Alternative arrangements:1) Five on a D ice2) O pportunistic Alliances3) Alliances based on cultural

proximity4) Emerging power alliances


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Emerging Energy Security Issues

The traditional energy security elements supplysources, demand centres, geopolitics and marketstructures have been joined by additionalconsiderations. T hese include theinterconnectedness of world economies and energyinfrastructure systems, climate change concerns,technological innovation and increased pressurefrom a broader array of stakeholders.

O il has been a global commodity for many

decades, delivered across borders via pipeline, byrail and by tanker trucks and ships. As mentionedabove, natural gas is also increasingly becoming aglobal commodity. International pipelines alreadytransport natural gas from North Africa to Europe,from R ussia to Europe, from C anada to the UnitedStates, from Bolivia to Brazil and eventually fromR ussia to Asian markets, while natural gasmovements by LNG tankers also continue to grow.These emerging transport links offer opportunitiesfor cooperation during energy emergencies, butalso provide additional risks to economies that areso interdependent.

Supply disruptionsDuring the N orth American supply disruptionscaused by Hurricanes K atrina and Rita, theinterconnectedness of the energy infrastructurebecame crystal clear. O il product and natural gaspipelines were not able to move product becausethe electric power that operated compressorstations was shut down. R efineries that dependedon power from the grid were not able to resumeoperations until the electric power lines werereconnected. In some instances, neither telephone

land lines nor cell phones were operable becausethe electronic connections were out of service. Theenergy industry is integrated and tied to physicaland communication infrastructures in ways thatinfluence how energy security concerns, includingthe risk of terrorism, need to be reassessed.

G eopolitical alliances continue to shift along withsupply sources and demand centres. T he Russianoil and gas sector is increasingly linked to bothEurope in the west and potentially to A sia in theeast. The traditional East-West and North-South


structures have become far more complex with thedevelopment of multiple international tradingagreements and the rise of the World TradeO rganization. T he opening up of R ussia, the CaspianSea region and Eastern Europe is leading to neweconomic and political connections that need to beintegrated into any conversations about energysecurity (see Box 19) .

Climate changeC limate change concerns also affect the perceptionsof energy security. The objective of diversification of oilsupplies has been replaced by the desire fordiversification of all energy sources to meet energysecurity and environmental and reliability concerns.Although natural gas is referred to as the fuel of choice, in fact, the emphasis should be on choice.M any more fuel options are available today, comparedto the 1970s. Wind power is competitive in somemarkets and subsidized in others. P hotovoltaic cellshave experienced an annual average growth rate of 43% over the past five years, resulting in totalshipments of 1,195 megawatts in 2004. A nd nuclearpower appears to be experiencing a renaissance.G lobally, four gigawatts (G W) of new nuclear plants

have come online since January 1, 2005, and anadditional 19 G W, representing 24 new nuclear powerplants, are currently under construction. A number of US power companies and partners have taken initialsteps to develop new nuclear reactors. T hese wouldbe the first nuclear plant orders in the US for morethan 25 years.

Biofuels gainingThe transportation sector, the primary market for oil, isexpanding its choices of fuels as well. T he growth inhybrid vehicle sales and the push by several major

automobile manufacturers to shift to hydrogen,indicate that the transport sector may well join thepower sector with a broader selection of fuel options.In many large cities in Asia, Europe and N orthAmerica, public transport systems are fuelling buseswith compressed natural gas and biofuels are gainingin popularity as well. G overnment incentives andregulations promoting ethanol and biodiesel are beingstepped up around the world, as is research intobiology and energy.

A renewed interest in energy efficiency supports bothenergy security and climate change objectives. T he


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tightness of energy markets can be relieved byreducing demand through conservation andenergy efficiency, or through the undesirablemethod of lower economic growth rates or byincreasing supplies. A combination of greaterefficiency and additional supplies is required.H owever, the political will to focus onconservation has been lacking. P rice signals mayassist with energy efficiency. H owever,successful efforts will be short-lived unlessconsumers either believe that higher price levelswill be sustained or there is a strongermarket/political/knowledge matrix to supportconservation.


The strong interest in carbon capture andstorage (C C S) technology can also be linked toboth energy security and climate change.Although the oil industry has led the way in C C Stechnology, it is of growing interest to the powersector. B uilding new coal-fired power plants thatare based on integrated gas combined-cycletechnology allows the operators to separate,capture and store streams of carbon dioxide.Because coal is both the most carbon-intensiveand the most abundant fossil fuel, carboncapture and storage offers an attractiveopportunity to keep coal in the fuel mix forenergy security without releasing greenhousegas emissions into the atmosphere (see Box 20).

Box 20 Perspective: Climate Change and Carbon Capture and Storage

By David M . R einer, L ecturer in Technology P olicy, Judge Business School, University of Cambridge, U nited Kingdom, and Paul Freund,C onvening Lead A uthor, Special Report on Capture and Storage of CO 2 , Intergovernmental Panel on Climate Change (IPC C ), United K ingdom

For many years, it has tacitly been assumed that the ultimate technical solution to climate change lay in replacing fossil fuels with renewableenergy, perhaps by nuclear power. M ore recently, attention has been given to the possibility of continuing to use fossil fuels withoutdamaging the climate by combining known technologies in a new way, in order to capture and store the carbon dioxide (C O 2) fromcombustion. M ost interest has been in applying this approach to the power generation sector, but it could also be used with any largesource, such as oil refining or steel-making. If hydrogen is used by vehicles in the future, it could also be possible to capture CO 2 fromhydrogen manufacture.

O ne method of capturing C O 2 is by washing the flue gas stream of a power plant with a re-usable solvent. T he CO 2 is recovered from thesolvent and pressurised for transmission through pipelines to the storage site. Storage is most likely to make use of natural geologicalreservoirs, such as disused oil or gas fields, or deep salt-water filled reservoirs. All of these technologies are already in use for otherpurposes the technology for capturing C O 2 has a history of over 60 years, while CO 2 has been shipped in pipelines over hundreds of kilometers and pumped into depleted oil reservoirs to enhance recovery for over 30 years.

No single technology can achieve the deep emission reductions needed to stabilise atmospheric concentrations, so many approaches willhave to be used. C apture and storage of CO 2 will likely add U S$10-$40/M Wh to the cost of generating electricity (depending oncircumstances) and reduce emissions from a power plant by 80-90% . T his cost is similar to or less than the cost of other options formaking deep reductions in emissions, such as wind power or nuclear power. M odeling studies have found that overall costs would bereduced by 30% if capture and storage is used.

Large-scale penetration of C O 2 capture and storage technologies will depend on assuring political and social acceptability by demonstratingits safety and improving its economic competitiveness. T he public remains largely unaware of this possibility, but environmental groups havebegun at least to consider it as a serious option to complement renewable technologies and as a potential alternative to nuclear power. T hefirst step is proving storage, with several such projects having already begun operation; the next stage will be for projects involving capturein power plants with transport and storage, which could be ready by 2010. Improving economic viability will require reducing the costs of capture, providing the incentives for investment and setting a carbon price sufficiently high to mak e the option attractive.


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ImplicationsInitially, this report explores the many differentmeanings of energy security which aredependant on the perspective of involvedindividuals, organizations and governments. Anyresolution to current concerns about energysecurity will need to reflect the many points of view (see Box 21).

In this final section of the report, we raise aseries of questions for discussion at WorldEconomic Forums Industry P artnership meetingsin the months ahead.

Signals that might increase supply.G overnment policy clarity sets the frameworkfor energy industry investment. There iscurrently a lack of government policy clarity ona wide range of issues, including climatechange, rent-sharing, stability of contracts andenvironmental and social impact requirements.Will new national or international agreementsemerge that reduce the risk of newinvestments?

Signals that might reduce or slowdemand growth. Historically, price signalshave triggered a new round of new energysupplies and energy efficiency gains to bringsupply/demand back in balance. What are thepossible signals for reducing energy demand?Will the price signal suffice? Is there arequirement for signals from governments?Will prices collapse?

Integration challenges. G lobalization hasenhanced the drive toward integration of multiple systems to squeeze out inefficiencies.In some cases, the integration is physical, with

interconnections all along the supply chain. Inthat case, physical security becomes critical.But integration also creates new vulnerabilitiesin a broader sense because a break anywherein the system whether the links are financial,

physical, or communication can cripple largesegments of an economy. Exposure toincreased rates of natural disasters andpotential terrorist attacks underline thesevulnerabilities. H ow can societies takeadvantage of integration while also protectingagainst its risks?

Institutional and market structuralchange. The IEA was created to share theburden of a supply disruption in the M iddleEast. Will the current wave of energy securityconcerns foster new institutions? Willgovernments shift away from reliance onenergy markets and recapture thecommanding heights? How can othercountries C hina, India and R ussia beintegrated into the system? What are theopportunities for enhanced cooperationbetween consumers and producers (see Box22).

What are the implications of a new energysecurity paradigm? A re new structures needed?O r would modifications to our current approachthat focuses primarily on oil disruptions in the

M iddle East suffice?

The initial oil crisis of 197374 led to the creationof the IEA, and energy efficiency ratesresponded to the higher oil prices as well. But,from 1979 to1981, oil prices more than doubledas revolution and war in the M iddle Eastdisrupted oil production and exports. P ricesgradually declined over the next several yearsbefore collapsing in 1986. In addition to thecreation of the IEA, many national governmentsestablished strategic oil reserves as part of the

then-new energy security regime under the IEAumbrella.


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Box 21 A Perspective on Energy Security

By Abdallah S. Jum ah, P resident and CEO , Saudi Aramco

G lobal energy security is viewed by various stakeholders indifferent ways, depending on their interests and objectives.N otwithstanding these views, however, the key factorsimpacting the energy security and energy markets can bedivided into two broad groups. T he first group entails many

uni-dimensional national and international decisions andpolicies of the past that may have unintentionally impactedthe supply of energy to various consuming sectors in avariety of ways. In other words, the current situation maybe at least partly the result of our own injudicious actions.T he second group comprises, by default, the remainingfactors, some of which represent non-traditionaldevelopments that have taken place over time.R ecognizing the nature of the key factors, included in boththe groups, would help the international community suitablyaddress them, leading to enhanced energy security. T hefocus of this discussion is primarily on the first group of factors, which have not only played a major role in shapingthe current situation but also have important implicationsfor the future.

While the world energy demand has undoubtedly grownsignificantly over time, the planets total endowment of even conventional energy sources is sufficient to meet thecurrent and future demands for a long time to come.H owever, a mismatch between supplies and demand hasdeveloped for a variety of reasons, many of which involvedecisions centring on achieving narrow environmental,political, economic and/or financial objectives.

For example, the tightness in oil supply-demand balance isnot a function of scarcity of oil resources; it results from aconfluence of factors including restrictions on exploration inoffshore and environmentally-sensitive onshore areas;investment sanctions on some major producers; taxationpolicies by national governments, and discriminatory taxesbeing considered by international institutions; politicaluncertainty and instability in other producing areas, whichthe international community could help address; lag ininvestments and obstacles in permitting of infrastructurefacilities, including refining capacity, pipelines, storage,terminals and oil tankers; unrealistically tight and varyingrefined product specifications; and last but not least,

market speculation.

T he electric power industry has been impacted byenvironmental restrictions, permitting issues, exclusion of selective fuels through policy mandates, lagginginvestments, subsidies to selective consumer groups indeveloping nations, political agendas and the changing butstill uncertain structure of the industry with respect to itsfinal shape. T he nuclear industry has faced seriousregulatory and public pressures, working against its growth.In the gas sector, overly aggressive expansion withoutadequate regard for the corresponding expansion of supply, obstacles in the way of pipelines construction,difficulties in permitting LN G terminals and a lack of timelyinvestments have all contributed to creating the currentlytight gas market situation.

R egarding development of solutions to economic, political,environmental and public policy issues, a holistic approachthat carefully took into consideration the impacts on theworlds energy supply and security requirements wouldhave produced a different picture than the world is faced

with today. In the future, greater attention to the issuesdirectly impacting the energy supplies and markets,outlined above, combined with strengthened emphasis onenergy efficiency, conservation and demand sidemanagement, would be useful.

Alternative sources of energy and technologies will also beneeded in the future to complement conventional energysources, as demand continues to grow. H owever, it isimportant to ensure that the development of suchalternatives does not involve discriminatory policies againstconventional energy sources, on which the world willcontinue to depend for many decades to come. At thesame time, alternatives should be phased-in gradually andtimed optimally, as they reach commercial acceptance. T heenergy issue is so crucial to the worlds economic healththat overly optimistic expectations and prematureintroduction could risk jeopardizing the worlds energysecurity.

While sub-optimal decisions have contributed to thecreation of many of the energy supply-demand gaps beingexperienced today, new factors impacting energy securityhave arisen. T hey include, but are not limited to, terroristthreats against the supply system; major demand growth in

Asia and other developing nations, changing the face of global energy demand and growing environmentalconcerns and pressures. T he response to thesedevelopments should entail the establishment of carefullythought out safeguards against terrorist threats;introduction of appropriate enhancements to the existingstructure of international energy institutions to effectivelyinvolve energy producers and nations with large, rapidlygrowing demands; and the formulation of pragmaticenvironmental policies that concurrently address theeconomic as well as environmental concerns of society.

To avoid committing the mistakes of the past, the

structures being established to promote the consumer-producer dialogue should be strengthened, and takenmore seriously. T he recommendations resulting from suchdialogue should be woven into important public policy andeven relevant geopolitical decisions to ensure that theimpacts on global energy markets and world energysecurity are minimized, and energy-supply prospects areenhanced. C ontinuing to separately treat energy securityand other international policy matters that eventually impactsuch security is clearly inappropriate and should beavoided.

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4 This is an excerpt from an article published in the February 2006 H arvard Business Review. He can be reached at ged. davis@ weforum. org

Box 22 Perspective: From OPEC to OPIC

By G ed Davis, M anaging Director of the C entre for Strategic Insight at the World Economic Forum in G eneva. Aformer Vice-President at R oyal Dutch Shell, he is a current member of the editorial board of G eopolitics of Energy. 4

O il cartels were originally conceived of as defensiveinstruments, created by or on behalf of suppliers in a timeof excess capacity, with the aim of stabilizing crude oilprices. T he idea was that, by maintaining sufficient spareoil production capacity, you could influence mark et pricesand minimize volatility of great importance not only toproducers but also, it should be noted, to oil consumers(even if they would have preferred that stability to come ata lower cost). Today, however, with producers workingpretty much at capacity and talk of US$ 100-a-barrel oil,its consumers who feel a need to band together for mutualdefense.

T he O rganization of Petroleum Export Countries,established in 1960, wasnt the first cartel. In the 1930s the(somewhat incongruously named) Texas R ailroadC omm ission regulated the states oil production to k eepprices from plummeting. A round the same time, the biginternational oil companies sought to stabilize pricesthrough the so-called Achnacarry Agreement (named afterthe Scottish castle where the pact was signed), in whichthey agreed to collaborate on the management of crudeoutput. B oth the Texas C omm ission and the AchnacarryAgreement became obsolete in the early 1970s, when USoil production was going full tilt and O P EC states hadreplaced the oil companies as primary custodians of the oilspigot.

O f course, regulation of crude oil prices through themanagement of production has its limits. We almost forgetthat, during the 1998 Asian crisis, oil prices plummeted toUS$ 10 a barrel because of the abrupt drop in demand.M ore recently, rising demand in A sia, along with growingconcerns about oil supply security, pushed prices aboveUS$ 70 a barrel before falling back to a range of US$ 55 toUS$ 65 a barrel.

And O P EC can do little about it. With crude production atcapacity in most O P EC countries, the cartel is unable torein in prices by increasing output. Indeed, despite theroughly 15% growth in projected worldwide productioncapacity over the next five years, output will only barelykeep up with growing demand. Without a cataclysmiceconomic downturn among oil consuming nations, O P EC or any other conceivable organization of oil producers will no longer be able to manage the market.Which raises a question: As excess capacity gives way toexcess demand, will some institution replace OP EC as acontrolling mechanism? T he IEA currently monitors energymarkets, coordinates oil stockpiling, and recommends

options to consuming countries. C ould the next step be amore active institution to manage the collective concernsof oil importers an O P IC (O rganization of PetroleumImporting Countries) instead of an O P EC ?

T he organizations mem bers would be the largest andfastest growing energy users: the United S tates, theEuropean Union, Japan, C hina and India. I ts aims aresponse to both growing crude oil supply constraints andthe consequences of fossil-fuel use, such as global climatechange would be the management not of oil production but of

oil consumption.

Such an organizations programmes and policies wouldneed to cover three time frames. In the long term say, thenext 50 years, during which oil consumption will certainlypeak and then drop off as remaining reserves dwindle itwould promote the development of alternative energysources, such as biofuels, and technologies that thatwould reduce energy use. In the medium term, roughly thenext 20 years, the group would invest in new productionfacilities to improve international flows of crude oil andnatural gas and work to protect such investments byimproving security in oil and natural gas-producing areas.In the short term over the next five years, the organization,its policy options constrained by existing capital stock andprior investments, would work to foster a closercoordination of members energy policies. It would alsoencourage an active programme of buying and sellingcrude from expanded stockpiles in order to maintain priceswithin an agreed band even as it acknowledged thehistorical difficulties in trying to stabilize commodity pricesthrough buffer stocks.

C ould such an organization an O P IC actually work?D espite an array of conflicting interests, members wouldshare the strong desire to ensure continuity of oil supply atthe lowest feasible price. M ost would also see the benefitsof addressing environmental issues and lessening theircollective dependence on oil. T here would undoubtedly bea major rift over whether to rely on market mechanisms orthe purchase of oil reserves and tied agreements with oilproducers to achieve the groups goals a difference thatwould test members policymaking and diplomatic skills.But the alternative to such an organization an array of regional groups and large states pursuing their own energyinterests in a form of energy mercantilism wouldnt belikely to serve the interests of any of the big oil consumers.

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There are at least eight factors that influence theimpact of high oil prices on an economy and onoil demand. Are these factors equally applicableto all energy? (see Box 23).

Energy is the hinge of the world economy andits security cannot be taken for granted. Theenergy security paradigm is evolving into a newform based on a far more complex integrationof economies, energy infrastructure and politicalalliances. The old energy security structurescontinue to operate and operate effectively, asillustrated by the recent effective response to theenergy supply disruptions caused by HurricanesK atrina and R ita in 2005. Tapping into strategicreserves helped smooth the loss of productionand sent a dont panic message to the marketand consumers. Shipping refined products fromthe European market to the US m arket easedmarket pressures. Frequent communicationsregarding the critical points of disruptionsallowed policymakers and the energy industry towork cooperatively to address problem areas.The flexibility to lift environmental and national

shipping rules temporarily enabled the disruptionof pipelines and refineries to be compensated forby enabling gasoline to flow quickly to themarkets that needed it most.

H owever, the next crisis no doubt will havedifferent causes. T he changes in supply sources,demand centres, geopolitics and marketstructures with the addition of supply chainintegration, new technologies, public scrutinyand climate change will certainly require freshsolutions. The roles of C hina, India and R ussiawill weigh on both the supply and demandelements. Summaries of the World EconomicForum's future scenarios for each of thesecountries follow in this document. For all thereasons discussed in this report, this is anappropriate time to consider how the traditionalenergy security paradigm might be enhanced toaddress the new reality and meet the long-termneeds of both consumers and producers.


Box 23 Factors that Influence the Impact of High Oil Prices on the Economy and Oil Demand

Speed and magnitude of price increase . A severe, volatile increase in oil prices is more harmful than a moderately pacedrise that allows markets to adapt.

Duration of price increase. A brief price spike is less disruptive than an enduring shift upward.

Oil intensity. The more oil-intensive an economy, the more damage high prices can inflict.

Fear factor. The degree of anxiety and uncertainty about the future associated with high oil prices has a bearing on economicconfidence and financial markets.

Pricing policy. Subsidies or high taxes can mute impact on demand.

Substitutes and adaptation. Availability of alternative fuels or behavioural change influences the nature of adjustment.

Recycling of petro-dollars. How quick ly oil exporting countries convert higher revenues into consumption and imports affectsthe impact on global economic growth.

Financial variables. How high are nominal prices in real terms? What is the value of the dollar, in which crude oil isdenominated, in relation to other major currencies?


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China and the World:Scenarios to 2025

C hinas economic development over the pasttwo decades has surprised both her critics andsupporters. Since 1978 when C hina launched itsFour M odernizations reform process under theleadership of D eng Xiaoping, growth hasaveraged 9.5% annually. A s a result, C hina hasclimbed in world rankings to become the sixthlargest economy in nominal G ross DomesticP roduct.

In the last few years, C hina has thus become thefocus of much attention. Some parts of business, academia, government and civilsociety are more highly engaged in C hina thanever before. All need to think about what couldhappen next. But, C hinas future is not merely of interest for the experts. C hinas impact on globalgrowth, resource allocation, trade andinvestment, as well as geopolitical balance hasdirect consequences on every part of the planet.

The Key Questions for the Scenarios

When looking at the future of C hina, two corequestions stand out. The way in which thesequestions are answered will largely determine thepath of C hina in the next two decades:

Can China implement internal reforms tofurther its development?

How will Chinas relationship with the restof the world affect its development andshape the global context?

A number of factors will influence how thesequestions are answered in the next twodecades: The intent of C hinas leadership and its ability

to ensure implementation of decisions made; The choices made in economic policy,

including the degree of liberalization andopenness;

The extent to which social stability can bemaintained and popular expectationsmanaged;

The reaction of other global actors to C hinas

rise, and the broader geopolitical situation.

Based on these factors and core questions,three scenarios emerge for C hina and theWorld over the next 20 years. T he threescenarios are supported by detailedmacroeconomic modelling.

Selected Scenarios from the World EconomicForums Scenarios Series, China, India, Russia

UnfulfilledPromi s e

New S ilk Road

RegionalTie s

INEFFECTIVE INSTITUTIONAL REFORMS EFFECTIVE INSTITUTIONAL REFORMS

I N C L U

S I V E

G L

O B A L E N V I R

O N M E N T

D I S

C R I M I N A T I V E

G L

O B A L E N V I R

O N M E N T

Box 24 China Scenarios


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Regional TiesR egional T ies is a story that plays out in aglobal environment where trade is hindered byprotectionism. H ence, C hina increasingly turns tothe Asian region to provide the motor for itstrade and investment and to support it on a pathof reform and economic development. C hineseleadership and vision facilitate the forging of regional ties that help overcome historicalenmities.

Unfulfilled PromiseUnfulfilled P romise describes a C hina where adesire for economic development is notsupported by necessary structural reforms.There is continued economic integration globally,but it is tempered by security concerns. In thisscenario, C hina struggles to implement toughreforms, with limited success; this has negativeconsequences for its economic, social andecological development. T he name reflects thegeneral sentiment among the C hinese peoplethat the promise made to them in terms of inclusive economic development has beenlargely unfulfilled.

New Silk Road N ew Silk R oad depicts the flourishingeconomic and cultural rise of C hina, a featachieved despite the presence of substantialinternal obstacles. T he scenario reflects C hinaspeaceful geopolitical integration and its sizeablerole in the exchange of goods, services,investments and ideas. T his success is driven bystrong and inclusive global economic growth,with an emphasis on trade integration and cross-border flows. It is backed up in C hina by wellexecuted financial, legal and administrativereforms, and the progressive emergence of amiddle class and internal market.

Selected Scenarios/China


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Conclusions

G iven the importance of China today, there canbe no doubt that the determination of theC hinese leadership to maintain the course of reform will be a decisive factor in the globalfuture. It is equally true that the support of otherglobal players, and their preparedness to

welcome C hina in its gradual rise in greatness,will have a direct impact on how C hina emerges.

G iven the close connection between C hina andglobal welfare, these scenarios indicate thatoutsiders must appreciate the scale of thechallenges faced by the government in Beijing,and that those in C hina need to comprehend thesensitivities of outsiders to its rise.

These scenarios are part of the World EconomicForums Scenario Series.

Selected Scenarios/China

Box 25 Comparing the Three China Scenarios

This table provides a comparison of some of the most important aspects of the scenarios

Regional Ties Unfulfilled Promise New Silk Road

Leadershipandgovernance

Strong one-partyleadership

Strategic vision helpsto weather theeconomic crises

R eactive leadership lacking in long-termvision

Fear of dissent withinthe ranks hinders localreform enforcement

Next generationleadership more open toindividual rights andsocial liberties

Foundations are laid forthe separation of

judicial, legislative andexecutive powers

Economicperformance

G lobal slowdownaffects exports toEurope and N orthAmerica, triggering afocus on domesticand Asian markets

G rowth eventuallyslows as export growthweakens and domesticmarket demand doessignificantly increase

Balanced growth basedon both external anddomestic marketdevelopment

High growth continues

Socialdevelopment

C hina succeeds inmaintaining socialstability and cohesiondespite a depressedglobal environment

Emphasis is placed onsocial inclusion andthe development of social systems

Unbalanceddevelopment driven bycoastal areas

High disparities acrossregions and classes

R eforms of state-ownedenterprises andaccelerated urbanizationcombined with aninsufficient social safetynet cause some initialconcerns

Inequality is tackled inearnest as of 2015

Externalrelationships

Successful regionalties fuel growth andprosperity in the regionafter the Western

countries shiftattention away fromthe region

Aspiration to be a majorglobal player not fulfilled

Lagging reforms affects

relations and trade

C hina plays anincreasingly active roleon the world stage andin international

organizations


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India and the World:Scenarios to 2025

Few countries can boast the immense diversityof India: among its 1 billion people, there are 18main languages, 844 dialects and six mainreligions. T he reforms of the mid 1980s and early1990s sharpened the pace of change and, asglobalization has advanced, prompted by rapidtechnological developments, India has becomemore significant in international markets. N owmany analysts are predicting Indias emergence

as a global player, set to follow the blazingeconomic success of another giant, C hina. It isnot difficult to see the rationale behind suchoptimism. K ey trends that could drive andsustain these new dynamics include:

Favourable demographics; A large pool of low cost, skilled labour; Entrepreneurial, indigenous companies; C ontinuing economic reforms and global

integration; A stable political regime and democracy;

A record of high, sustained growth rates.

The Key Questions for the ScenariosH owever, there are also major challenges thatIndia must address if it is to achieve andmaintain this kind of growth and development.The key questions for the scenarios are asfollows:

Can India engage the whole nation in itsquest for sustained security andprosperity?

How will Indias relationship with theworld impact the Indian Agenda?

Based on degrees of integration with the worldand inclusive growth and development, thereemerge three different scenarios for Indias futuredevelopment:

Selected Scenarios/India

INCLUSIVE GROWTH AND DEVELOPMENT

I S O L A T I O N F R

O M

T H E W

O R L D

EXCLUSIVE GROWTH AND DEVELOPMENT

I N T E

G R A T I O N W I T H T H E W

O R L D

?

P a h a l e

I n d i a

Bolly World

B h a t

a k t a

B h a

r a t

Box 26 India Scenarios


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Bolly World Bolly World is a story of how initial economicsuccess becomes unsustainable, and domesticsocial and demographic pressures soon triggeran economic reversal. But need this happen?C ould India achieve sustainable economic andsocial success?

Bollywood is the name given Indias filmindustry which is famous for its movies with theirspectacular song and dance numbers. T he titleBolly World portrays a future in which Indiasleaders are so dazzled by the immediate gains tobe made in international markets that they fail toimplement much needed domestic reforms.

Pahale India ("India First")P ahale India describes how a widely sharedvision for Indias future aligns national aspirationsand creates common goals. Everyone puts Indiafirst, determined that the entire nation will benefitfrom Indias development. T his building of abroad-based economy provides sufficientinternal strength to support Indias ambitions tobecome a major world player.

P ahale India means India First and this isreflected in the scenario in at least three ways:1) people from across India put the needs of their community and country first; 2) Indiaemerges as a global economic leader; and 3)Indias dynamic internal developments make it asource of inspiration for the rest of the world.

Atakta Bharat ("India Getting Stuck")H owever, a less benign future is also possible,especially if the international environment provesless supportive of Indias aspirations. In AtaktaBharat ("India getting stuck"), the globaleconomy slows, offering few benefits to India,while within India there is little and unevendevelopment.

Atakta Bharat describes an India getting stuckwithout direction reflecting the lack of unifiedaction and absence of effective leadership that,in this scenario, create a continuous andcumulative source of problems for India.

Selected Scenarios/India


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Conclusions

The challenges that India faces and the actionsthat India needs to take to secure its future seemwell known. The question arises: can its leadersand people put this understanding into pr

cera (2006) the new energy security paradigm

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