Geopolitics Of Energy

July 7, 2011

The Globalized Energy Market

I. The Big PictureII. Lessons, Patterns, and TakeawaysIII. Implications for New Factors in the Equation

The Big Picture: Facts and Implications

The persistent increase in oil prices over the past decade suggests that global oil markets have entered a period of increased scarcity. Given the expected rapid growth in oil demand in emerging market economies and a downshift in the trend growth of oil supply, a return to abundance is unlikely in the near term. We believe that gradual and moderate increases in oil scarcity may not present a major constraint on global growth in the medium to long term, although the wealth transfer from oil importers to exporters would increase capital flows and widen current account imbalances. Adverse effects could be much larger, depending on the extent and evolution of oil scarcity and the ability of the world economy to cope with increased scarcity. Sudden surges in oil prices could trigger large global output losses, redistribution, and sectoral shifts. There are two broad areas for policy action. First, given the potential for unexpected increases in the scarcity of oil and other resources, policymakers should review whether the current policy frameworks facilitate adjustment to unexpected changes in oil scarcity. Second, consideration should be given to policies aimed at lowering the risk of oil scarcity.

Lessons, Patterns, and Takeaways

from Historical Section• Diversification is essential to security – in terms of supply and transportation/infrastructure

• Security often depends on the existence of a “cushion” – extra supplies to replace supplies taken off line for any sort of disruption

• The commercial and strategic realms have more often than not been interwoven.

• Each price trough has general brought with it some reorganization of petroleum industry 

• A stable, unified, global oil market is the cornerstone of security. • It takes a crisis to galvanize responses; and a crisis that make people feel livelihood is at stake • Security is generally enhanced when governments resist the temptation to micromanage oil market

• Cooperation, not confrontation, is the path to security. • Fear and panic can dramatically exacerbate an already tight market, driving prices skyward when market

realities may not warrant it.

• Much of history of oil price, not a function purely of the market balancing supply and demand.

In sum, need to look at a multitude of factors :– Market dynamics – supply and demand, spare

capacity– Political realities and the nature of geopolitical

disruptions– Cast of characters – number of actors and orientation– Institutional structures; mechanisms for cooperation– Nature of the interaction between the public and

private spheres– Policy parameters and policy responses– Technologies– Existence of feasible alternatives at competitive prices– Psychology, emotions

All have implications for understanding the situation today…….

• Helpful to look to 2008 price rise, which reveals many of the new important dynamics

Globalization of Demand

• Immediate term, recession has dramatically reduced demand for energy

• But demand will increase with economic recovery• More than half of demand growth will come from

emerging economies– Bulk of this growth in the transportation sector

• OECD demand growth for oil is likely to stagnate– Switches to other fuels– Increases in energy efficiency

Future Conventional Energy Needs Will Largely Be Met by OPEC

Supply: Resources are there, but…..

……Slower Supply Growth Still Seems Likely

Supply threats are no longer primarily about the oil weapon…..

New Industry Structure: NOCs

New Factors in the Equation• Globalization of demand

• Constrained Supply

• New cast of characters: NOCs

• Emergence of new technologies – emergence of alternatives, energy efficiency

• Greater integration of financial and energy markets

• Climate change; warrants/invites government intervention in energy markets; creates uncertainty in the markets

• Government policies – especially those to grapple with/affect climate change/emissions;

• Multitude of interests in Middle East post-9/11