North American Energy Security and Energy Policy

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North American Energy Security and Energy Policy

• Bryne Purchase
• Queens Institute for Energy and Environmental
  Policy

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PRESENTATION OUTLINE

• Reminder of importance of energy to the North
  American way of life, provide a definition of
  energy security
• Outline a few historical facts on oil and
  geopolitics
• Review the current geographic concentration of
  fossil fuel reserves and our growing
  vulnerability to oil, and potentially future
  natural gas, supply disruptions
• Describe briefly why the economics of the energy
  industry can lead to dramatic price change and
  the potential macro-economic impact of major
  supply disruptions
• Conclude with some very deep and potentially
  divisive questions about Canadian energy and
  security policy.

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North American Energy Security

• North American culture is truly an energy based
  culture
• consume about 29 of worlds annual energy supply
  but represent only 6.9 (443 million) of the
  worlds population (6.5 billion).
• extreme dependence on fossil fuels (84.3) as the
  primary sources of our energy supply oil (40)
  natural gas (24) and coal (20.3).
• What is energy security? A reasonable degree of
  assurance that
• a prolonged and large scale supply disruption
  will not occur and/or that,
• if it does occur, its impact will be tolerable.
  
• The terms reasonable degree of assurance and
  tolerable impact are inevitably subjective.
• But then security of any kind is, ultimately, in
  the mind of the beholder. Energy security is no
  different in this regard.

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North American Energy Security

• Why North American energy security?
• Canada- US Free Trade Agreement and NAFTA.
• No National Energy Policy if anything it is a
  Continental Energy Policy
• The specific security threats I have in mind are
  politically motivated
• Terrorist attack against critical energy
  infrastructure inside North America or abroad
• Possible future military conflicts between nation
  states (eg US and Iran, China and the US?).

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Oil and Geopolitical ConflictEarly 20th Century

• Oil was at the centre of military strategy
  throughout the 20th century, beginning with two
  World Wars
• Conversion of British fleet to oil prior to WW l
  
• security of supply concerns lead to Government
  financial support for opening of Persian
  (Iranian) oil fields - leads to British
  Petroleum.
• WWI introduces mechanized, mobile warfare (tanks,
  trucks and planes).
• WWII
• Germany invents Blitzkrieg warfare lifeblood is
  fuel. Germans invade Russia to secure oilfields
  in the Caucuses. Coal liquefaction invented by
  Germans (47 of transport fuel supply at peak)
• US oil embargo of Japan in early 1941. Japanese
  pre-emptive strike at Pearl Harbour in December,
  as Japan tries to secure Indonesian oil fields.

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North American Oil Dependence and Vulnerability

• In 1945, North America was a net energy exporter
  and self-sufficient in oil, natural gas and coal.
  
• The US was the worlds largest oil producer (50
  of world production even as late as 1950).
• US supplied most of the oil needed by the Allies
  in WWII.
• Pursued a regulated domestic pricing policy.
• To-day,
• US oil production in lower 48 states peaked in
  1971.
• N.A. imports 39.8 of oil requirements (9.6mbd) -
  produced 14.5 million barrels of oil per day (US
  7.6 Mexico 3.8 and Canada 3.1mbd) and consumed
  24.1 million barrels per day (US 20.7 Mexico 1.4
  and Canada 2.0).
• A global oil market exists where global pricing,
  allocation prevails.

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Geopolitical Importance of Persian Gulf Saudi
Arabia

• In 1943, President Roosevelt declared defense of
  Saudi Arabia vital to US national security.
• Military aid and political commitment has grown
  as US oil imports and Saudi production has grown.
  
• Today, Saudi Arabia is THE key world producer at
  from 8.5 to 10 mbd
• 23 of worlds conventional reserves of oil
• 80 to 85 of the spare capacity in the world
• Half of Saudi output comes from one oil field and
  66 of Saudi production goes through one plant
  and two terminals
• Increasingly unstable regime.

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Persian Gulf and Caspian Sea Security

• Persian Gulf region today contains almost 65
  percent of known world conventional oil reserves
  (5 of worlds top oil producers)
• provides 28 of world supply, expected to rise to
  43 by 2030
• 68 of Japans oil requirements come from Persian
  Gulf and 45 of EU oil imports
• US imports only about 2.3 mbd from Gulf
  countries, but the key is that global pricing and
  economic interdependence makes all vulnerable
• peak oil will only increase the dependence on
  this region
• Much of world oil trade goes through Straits of
  Hormuz (14 mbd) Bab El-Mandeb Bosphorus (
  alternate route Baku-Tbilisi-Ceyhan buried
  pipeline) Malacca (11 mbd).
• The countries involved are virtually all Islamic
  countries with political, social and religious
  traditions which are often radically different
  from the West.
• Energy revenues represent most, if not all, the
  available foreign exchange.

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Middle East and Energy Security Post WWII

• 1951-1953 PM Mossadegh of Iran nationalizes
  Anglo-Iranian Oil Co, leads to CIA/MI6 plot to
  oust PM, keep Shah.
• Suez canal crisis of 1956. President Nasser
  nationalized canal (66 of Europes oil passed
  through Suez) Israel, France and Britain attack.
• 1973 Arab-Israeli War, the Arab oil embargo of
  the US and the first OPEC price spike (OPEC had
  56 of world production).
• 1979 Iranian Revolution, ousts Shah and
  introduces Islamic republic leads to the second
  OPEC price spike.
• FSU occupies Afghanistan (1979).

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Middle East and Energy Security Post WWII

• In 1979, President Carter declares access to oil
  a vital national interest, to be defended by
  any means necessary.
• Carter doctrine is still a central pillar in US
  foreign policy
• Carter establishes rapid deployment military
  force to secure US and Allied interests - made
  permanent in 1983 by President Reagan.
• Central Command one of five unified commands
  covering the globe and has suffered far more
  military casualties than any other US command.

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Middle East and Energy Security Post WWII

• Series of inter-related wars involving oil and
  related terrorist and regional security concerns
• Iran-Iraq war (1980-88)
• Iraq invasion of Kuwait (1990) and the 1991 Gulf
  War
• US forces in Saudi Arabia leads to 9/11 attacks
  on US in 2001
• US led invasion of Afghanistan (2002).
• US led invasion of Iraq (2003).
• Now a quagmire in which the US and its Allies
  cannot win and cannot leave without the grave
  potential for a region destabilizing civil war.
  (Sunni/Shia and the Kurds)

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North American Energy Dependence and Vulnerability

• What About Natural Gas?
• N.A. consumes 29.2 of world production and has
  4.1 of proven reserves.
• North American conventional natural gas
  production is close to peaking. Future supplies
  to meet growing demand will depend increasingly
  on imports of Liquefied Natural Gas (LNG).
• LNG trade reasonably well developed in Asia and
  Europe. North American gas prices will be set
  globally once LNG trade matures. Already NA and
  European gas price convergence.

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North American Energy Dependence and Vulnerability

• What About Natural Gas?
• Natural gas has ultimately the same security risk
  potential
• The Middle East in total has 40.6 of worlds
  known reserves
• The largest proven reserves of natural gas are
  in Russia (26.7), Qatar (14.4), and Iran
  (15.3).
• Europe already dependent on imports of natural
  gas
• Today, OECD Europe imports about 40 of its
  consumption needs, growing to 66 by 2030.
  Druzhba pipeline (worlds longest).
• Currently 40 of EU gas imports are from Russia
  Algeria (30) Norway 25).
• By 2030, Russia alone expected to supply 60 of
  gas imports.
• Russia has shown an increasing willingness to use
  access to energy as a political tool.

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North American Energy Dependence and Vulnerability

• What about coal?
• In 2004, North America had 279 billion short tons
  of coal 96 of which is in the United States.
• North America has 28 of worlds reserves or
  250-300 years supply at current consumption
  rates. Russia(17) China (13) and India (10).
• Coal already supplies 50 of US electricity needs
  and this could be expanded throughout NA..Liquid
  transport fuel can be made from coal by the
  Fisher-Tropsch process.
• Key issue about coal is the high environmental
  costs, in particular air pollution (NOx, SO2, PM,
  CO2) and mercury. However
• Clean coal technologies are available at higher
  capital cost to produce electricity
• Can sequester CO2 in underground storage
  (enhanced oil and gas recovery or in deep saline
  aquifers)
• But no technically feasible alternative is
  instantly available and in large scale.

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Economic Impacts Fundamentals of Energy Supply

• Fundamentals of energy supply
• Mega-projects dominate large economies of scale
  in production (extraction, pipelines, tankers,
  refineries, electricity generation, transmission
  and distribution)
• Very capital intensive facilities (huge financing
  requirements 100 millions - billions)
• Very long lived facilities 25 to 40 years or
  longer
• Very long regulatory approval process and
  construction time (eg nuclear, oil sands, etc) (5
  to 10 years or longer)
• Energy storage is limited and costly
• All these risks lead to Boom/Bust investment
  cycle.

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Supply Demand Price Inelastic in Short Run
D
S
S
120.00 90.00 70.00 50.00
Price(/barrel)

• In general
• High impact supply/demand
• disruption
• -High financial risk

D
S
0 50 100
15 0
Output (millions barrels/day)
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Economic Impact of Price or Availability Shocks

• All economic downturns in the U.S. since 1973
  have followed an oil price spike
• OPEC energy price shocks are credited with
  producing a 7 decline of real GDP in OECD
  countries in 74/75 and 7.25 in 80/82.
• Recent energy price increases have had less macro
  impact on the Western economies
• Less energy intensive
• Labour markets have changed
• Asia absorbs much of the energy price impact,
  without inflation.
• For Canada ( a net energy exporter) the short-run
  macro-economic impacts may be positive. But
  significant inter-regional reallocations
• For example, Ontario economy is very energy
  dependent in its manufacturing sector and on
  the US market.
• Quandary for Canadian monetary policy regional
  disparity of impact.
• But energy security may now be more about what
  happens in a catastrophic event embargoing a
  significant portion of worlds oil supply for a
  prolonged period.

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Conclusion Energy Security Policy Questions

• Where does Canadas energy policy fit in this
  picture?
• Is energy security a legitimate concern of
  Canadian public policy or should it be left to
  the private market?
• Should Canadian public policy attempt to
  subsidize domestic energy production (eg nuclear,
  biomass, etc), promote alternative transportation
  fuels ( eg coal liquefaction) and/or otherwise
  limit the import of energy (eg LNG) from
  overseas?
• If so, how much security should we buy and what
  price should we pay?
• Should Canada simply react to US national energy
  policy and our most strategic and powerful Allys
  perception of Continental Energy Security?
• Should Canadians be prepared to assist in
  protecting (by any means necessary)
  international energy transport and supply
  facilities from any and all aggressors?