The Changing Face of Energy Security

For three decades, the rich world has sought to curb its addiction to imported oil. But, despite the anxious rhetoric, the oil-supply problem has become worse and energy security more complex.

For three decades, the rich world has talked about curbing its addiction to imported oil. But, despite the anxious rhetoric, the oil-supply problem has become worse and energy security more complex. Notwithstanding politicians’ repeated calls for energy independence, over the past 30 years the United States, for example, has doubled its dependence on imported oil, which now accounts for nearly two-thirds of its oil needs.

Threats to cut oil supplies in order to change a country’s foreign policy have a long history, particularly where the Middle East is concerned. Arab members of the Organization of Petroleum Exporting Countries called for an embargo at the time of the 1967 war, but it had little effect because the US was then largely self sufficient.

But by the 1973 Yom Kippur war, the Arab oil embargo had a greater effect, owing to America’s growing demand for imported oil. The embargo drove up prices and unleashed a period of inflation and stagnation worldwide. It also demonstrated that oil is a fungible commodity. Even though the embargo was aimed at the US and the Netherlands, market forces shifted oil among consumers, and in the long term all consuming countries suffered shortages of supply and the same price shock. Oil embargos turned out to be a blunt instrument that hurt many besides the targeted countries.

In the aftermath of the oil price shocks, energy security policy has had four components. By liberalizing energy prices, governments allowed markets to encourage conservation and new supply. In addition, governments introduced modest subsidies and regulations to encourage conservation and renewable energy sources. Some governments began to store oil in strategic petroleum reserves that could be used to for short periods in a crisis. Rich countries also helped to create the Paris-based International Energy Agency, which coordinates policies (including strategic reserves) among consumer countries.

Such policies still make sense. They would probably not be adequate, however, to deal with a prolonged disruption of supplies. The world is not running out of oil, but two-thirds of oil reserves are located in the politically unstable Persian Gulf region.

The US imports only a small portion of its oil from the Persian Gulf. Its largest supplier is its stable neighbor, Canada. But the lesson of 1973 is that a disruption of Gulf oil supplies would raise prices and damage both rich and poor economies, regardless of how secure their own sources of supply might be.

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Moreover, new dimensions of the problem of energy security have emerged in the last few years. One is the great increase in energy demand from the rapidly growing economies of Asia, particularly China.

China appears to believe that it can secure its energy imports by locking up oil contracts with pariah states like Sudan. However, while this short-sighted mercantilist approach creates foreign policy problems over issues like Darfur, it will not really protect China in a time of supply disruption. It would be far better to bring China (and India) into the IEA, and encourage normal Chinese participation in world markets.

Another new dimension of the energy security problem is the manner in which high prices and increased reserves have transferred power to energy producing countries. State-owned companies now control far more oil and gas reserves than do the traditional private energy companies once known as the seven sisters. Many of these state-owned companies in countries like Russia and Venezuela are not responding merely to market forces, but are using their newfound pricing power for political purposes.

Finally, the energy security problem has been complicated by the problem of global climate change. As the science has become increasingly clear, climate change is now a major political issue at the global and national levels.

Rising sea levels, drought in Africa, and increasingly turbulent storms all pose a new type of threat that must be taken seriously. So measures to deal with energy security must address the demand side even more than the supply side.

Measures that some legislators favor, such as transforming coal into liquids, increase secure supplies, but they imply more carbon dioxide emissions than imported oil does. They should be avoided until technologies for clean coal or carbon capture are perfected. On the other hand, reducing demand through improved energy efficiency and conservation measures are beneficial for both the security of supplies and the global climate.

But it is not enough for the US and European Union countries to improve their energy efficiency unless other countries do so as well. China and India can pursue security of supply by using their large coal resources, but unless they also have access to improved coal technology, the burdens they impose on the atmosphere will be large.

This year, China will surpass the US in emissions of greenhouse gases. It builds nearly two new coal-fired electricity plants each week. In such a world, energy security can no longer be summed up as greater energy independence. Instead, we must find better ways to cope with energy interdependence.