What 'Energy Security' Looks Like in the 21st Century

Transcription

1 What 'Energy Security' Looks Like in the 21st Century By Matthew Bey Senior Global Analyst STRATFOR September 19, 2017 (CHOMBOSAN/iStock) For nearly a decade, lobbyists, academics and politicians alike have hailed the shale revolution as the guarantor of U.S. energy security. U.S. President Donald Trump has even taken their expectations a step further, envisioning a world of American "energy dominance," where the country's oil exports would fortify the supplies of its closest allies. But as the severe fuel shortages that swept across Texas and Louisiana in the wake of Hurricane Harvey have shown, America still heavily relies on those states' Gulf coasts to refine crude oil into gasoline, diesel and other petroleum products. True energy security, then, still seems to be just out of the United States' reach. At least, it is based on some definitions of energy security, of which there are many. To the International Energy Agency, the term refers to "the uninterrupted availability of energy sources at an affordable price." But even this simple explanation raises more questions than it answers: What is an affordable price, and what's the tradeoff between the affordability and reliability of supplies? Faced with unique challenges in the energy sector, every nation would respond to these questions in a slightly different way based on their own priorities. And as technological progress reshapes the structure of global energy markets in the 21st century, the priorities of producers and consumers around the world will doubtless change. U.S.: Steadying Prices and Loosening Up Logistics

2 For its part, the United States has traditionally centered its energy policy on the goal of selfsufficiency. Driven by fears of the price shocks that OPEC's 1973 oil embargo triggered, American politicians have long touted the idea of reducing the country's dependence on Middle Eastern producers. In doing so, they hoped, U.S. interests in the region would decline by default, creating room for the United States to someday withdraw from it entirely. For its part, the United States has traditionally centered its energy policy on the goal of selfsufficiency. Driven by fears of the price shocks that OPEC's 1973 oil embargo triggered, American politicians have long touted the idea of reducing the country's dependence on Middle Eastern producers. In doing so, they hoped, U.S. interests in the region would decline by default, creating room for the United States to someday withdraw from it entirely. That belief, though certainly applicable in the 1970s, is now largely outdated. In a physical sense, U.S. energy supplies are quite secure: The country is already a net exporter of coal, and it is expected to become a net exporter of natural gas by the end of the year. Meanwhile, though the United States still imports about 8 million barrels per day of oil, the international oil market has become so flexible and oil so fungible that the United States could counter any shortfalls in supplies from one producer with output from another. Even in the worst-case scenario, in which oil trade through the all-important Strait of Hormuz ceases, Washington could mitigate oil shortages for some time by tapping into its strategic petroleum reserve. That belief, though certainly applicable in the 1970s, is now largely outdated. In a physical sense, U.S. energy supplies are quite secure: The country is already a net exporter of coal, and it is expected to become a net exporter of natural gas by the end of the year. Meanwhile, though the United States still imports about 8 million barrels per day of oil, the international oil market has become so flexible and oil so fungible that the United States could counter any shortfalls in supplies from one producer with output from another. Even in the worst-case scenario, in which oil trade through the all-important Strait of Hormuz ceases, Washington could mitigate oil shortages for some time by tapping into its strategic petroleum reserve. Rather than preserving its access to oil, then, the United States is more interested in protecting itself from price changes in the market at large. After all, sharp dips in Middle Eastern oil production would push energy prices upward worldwide including in the United States. A lengthy shipping shutdown in the Strait of Hormuz, moreover, would wreak havoc among Asian economies by restricting their energy supplies, carrying consequences that would ripple throughout the global economy as well. In light of these concerns, it is no surprise that the United States and Saudi Arabia remain such close allies: Riyadh has a long-standing policy of maintaining enough spare capacity to quickly ramp up its production in order to stabilize oilstarved markets. Rather than preserving its access to oil, then, the United States is more interested in protecting itself from price changes in the market at large. After all, sharp dips in Middle Eastern oil production would push energy prices upward worldwide including in the United States. A lengthy shipping shutdown in the Strait of Hormuz, moreover, would wreak havoc among Asian economies by restricting their energy supplies, carrying consequences that would ripple throughout the global economy as well. In light of these concerns, it is no surprise that the United States and Saudi Arabia remain such close allies: Riyadh has a long-standing policy of maintaining enough spare capacity to quickly ramp up its production in order to stabilize oilstarved markets. The United States' energy strategy abroad, therefore, is simply an extension of its broader imperative to keep global sea lanes open. But as hurricanes Katrina and Harvey have made clear, the greatest threats can come from within. The United States' rigid distribution systems have opened the door to short-term supply crises, and though the country is unlikely to move its refining centers away from the coast, it may seek to build more flexibility into supply lines at home in order to mitigate the risk of severe shortages in petroleum products down the road. The United States' energy strategy abroad, therefore, is simply an extension of its broader imperative to keep global sea lanes open. But as hurricanes Katrina and Harvey have made clear, the greatest threats can come from within. The United States' rigid distribution systems have opened the door to short-term supply crises, and though the country is unlikely to move its refining centers away from the coast, it may seek to build more flexibility into supply lines at home in order to mitigate the risk of severe shortages in petroleum products down the road. Europe: Weaning Off Russian Supplies Europe: Weaning Off Russian Supplies Across the Atlantic, Europe is coming to grips with a problem of its own: For the Continent, there is no real substitute for Russian natural gas. Last year, European countries imported 190 billion cubic meters of Russian natural gas via pipeline, a volume equal to more than half the amount of liquefied natural gas traded by sea each year. To make matters worse, most Central and Eastern European nations lack the physical infrastructure that would be needed to bring in supplies from non-russian producers a shortcoming made painfully clear in the 2000s, when Russia twice cut off natural gas flows to Europe as a means to political ends. Consequently, Europe's energy policy revolves around Russia's ability to use energy supplies as a political weapon, and the Continent's inability to stop it. Across the Atlantic, Europe is coming to grips with a problem of its own: For the Continent, there is no real substitute for Russian natural gas. Last year, European countries imported 190 billion cubic meters of Russian natural gas via pipeline, a volume equal to more than half the amount of liquefied natural gas traded by sea each year. To make matters worse, most Central and Eastern European nations lack the physical infrastructure that would be needed to bring in supplies from non-russian producers a shortcoming made painfully clear in the 2000s, when Russia twice cut off natural gas flows to Europe as a means to political ends. Consequently, Europe's energy policy revolves around Russia's ability to use energy supplies as a political weapon, and the Continent's inability to stop it.

3 Europe's Energy Dependence Most European countries depend on Russia for more than half of their natural gas. Percentage of total natural gas used that was imported from Russia PEPCE',T Switzerland Netherlands Romania United Kingdom France Italy Denmark Czech Republic Turkey Germany Hungary Poland Austria Slovakia Greece Belarus Bulgaria* Finland* Bulgana and Finland experienced a natural gas sm Sources Gazprom, BP StatIstIcal Review of World ti-,g / Historically, the European natural gas market has been disjointed enough to enable Russia to single out individual countries, manipulating prices and supply volumes with the intent of exacting political concessions. Thanks to the Continent's inflexible pipeline infrastructure, Russia's European targets had few opportunities to seek supplies from neighboring states to mitigate the shortages Moscow caused. Understanding the danger the Kremlin's tactics portended, Brussels worked to unite the European Union's natural gas market to reduce Russian leverage over its individual members. To that end, the Continental bloc has prioritized and incentivized the construction of interconnecting pipelines across Europe, so that countries can more easily trade natural gas with one another. It has also spurred the creation of regional spot markets to encourage such trade, as well as the establishment of storage facilities in which to build up reserves. In support of these measures, Brussels has passed legislation to knit the European market more closely together. (Chief among these bills is the Third Energy Package, which bars Russian energy giant Gazprom from owning the European pipelines that ferry its natural gas to the Continent.) All of these endeavors have undermined Russia's ability to manipulate the energy supplies of specific European customers, even if it retains the ability to influence the natural gas imports of the Continent as a whole. Despite this progress, Europe's reliance on Russian energy is a persistent source of contention among EU members. Unlike many of their Eastern European peers, Western European states have avenues other than Russia for accessing energy supplies. For instance, many are linked to North Africa's natural gas market, are connected to North Sea pipeline infrastructure or have built their own LNG terminals. As a result, these countries are far more concerned with Moscow's use of natural gas as a political weapon in Eastern Europe and by extension, its

4 ability to undermine Continental unity than they are with regional volumes of imported Russian natural gas. Rather than sinking tens of billions of euros into the massive projects that would be needed to ease Eastern Europe's reliance on Russian energy, Western Europe would prefer to simply make those supplies more difficult for the Kremlin to use in service to its political agenda. By contrast, many Eastern European states are equally concerned by their lack of alternative energy sources. Even if these countries could trade natural gas with one another, it would still be of Russian origin. And as the cutoffs in the 2000s demonstrated, Russia is willing to sever supplies to the entire Continent if necessary. Energy pipeline projects intended to bypass Eastern Europe, such as Nord Stream II, are deeply concerning to countries like Poland, Ukraine and Slovakia for precisely this reason. With such pipelines built, Russia can more easily block supplies flowing to Eastern European states without causing significant harm to Western Europe in process. While natural gas resources are undoubtedly at the heart of Europe's energy concerns, the Continent has also become a leader in conceptualizing energy security beyond supply volumes alone. Just as Europe has sought to create a unified natural gas market, it has also worked to build a single electricity market that would encourage a robust electricity trade across the Continent. Many European states, moreover, have moved to the leading edge in adopting renewables, banning fossil fuel vehicles and, in France's case, approving plans to prohibit oil and natural gas production. China and Japan: Keeping Choke Points Open Much like Eastern Europe, China and Japan depend heavily on imports to satisfy their energy needs. As it stands, they are the largest and third-largest net importers of oil in the world; they switch positions in their net imports of natural gas. Because neither country can hope to ever completely power its economy with the cleanest of fossil fuels, both have placed a premium on alternative energy sources such as wind, solar, hydro and, at times, nuclear power to limit their reliance on foreign energy. In stark contrast to the Continent, however, Japan and China do not share Europe's concerns about the use of energy as a means to political ends. Instead, disruptions to their supplies are more likely to come on the high seas. To the two Asian powers, the most worrisome maritime choke points lie nearby in Southeast Asia, including the Strait of Malacca.

5 Shipping Lanes and Energy Security The United States is isolated from the world's oil trade choke points because of its lengthy shipping lanes and diverse array of suppliers. China and Japan, however, don't have the same luxury. Any disruption to trade in the Strait of Hormuz or the waterways near the Indonesian Archipelago would cut swiftly and deeply into those countries energy supplies. 0 Choke point Oil shipping lanes Danish Straits Tinkish Straits Suez Canal/ Sumed Pipeline Strait of Hormuz Panama Canal Gulf of Guinea Babel- Mandeb Archipelago * 1 1 Malay Strait of Malacca/ Indonesian Archipelago AdrrInF,tratiOrl r,tfc,1 411,, For decades, China has viewed its reliance on global shipping as a critical vulnerability to the superior naval power of the United States and its allies, including Japan, South Korea and Taiwan. Beijing's energy policies are therefore intimately linked to its broader security strategy of boosting its naval capabilities, both to protect the choke points its imports pass through and to extend its reach into the South China Sea. All the while, it has built up as many land-based supply chains as possible to open its doors to other sources of energy and raw materials from Central Asia and Russia. Japan has many of the same maritime concerns as China, but its response to them has been quite different. To counter its naval deficiencies, Tokyo has formed a close alliance with the primary guardian of global maritime security: the United States. At the same time, Japan has addressed its inability to diversify toward overland imports by bolstering its domestic nuclear power industry. As the public's fears of nuclear meltdown have hampered Japan's attempts to bring its nuclear reactors online, however, Tokyo has become even more reliant on foreign sources of energy. And as China's naval power has grown, so have Japan's doubts about the United States' ability to keep regional shipping lanes open. The Dawn of a New Era This modern interpretation of energy security, which features flexibility in supply chains as its cornerstone, is becoming increasingly common in today's globalized world. And perhaps we shouldn't be surprised: Many of the most painful resource gaps counties countries have faced in recent years have stemmed from unyielding distribution networks at home, rather than steep drops in imports or sharp increases in price.

6 Japan is a case in point. Overnight, the country's strategic strength nuclear power became a fatal weakness in the wake of an earthquake that caused a reactor meltdown at the Fukushima Daiichi plant in In the months that followed, Tokyo quickly learned that its electricity market, controlled by 10 regional monopolies, was not responsive enough to manage the crisis, especially when it forced the shutdown of other Japanese nuclear reactors as a precaution. Meanwhile, the rise of renewable energy, electric vehicles and new ways of storing energy will further reshape the concept of energy security in the years ahead. As the world's attention shifts away from fossil fuels, raw materials such as lithium will take center stage. But countries won't necessarily need continuous access to these goods or to the active supply chains such access entails as they do today with oil. For instance, nations seeking lithium for use in the production of batteries could easily get by on intermittent access to new sources of the material or recycling, minimizing the damage that temporary disruptions to the world's lithium supplies could do. New technologies, in turn, will draw the focus of nations from supply chains beyond their borders to those within them. Renewable energies and advanced technologies will inevitably and fundamentally alter the way national and regional electricity grids operate, placing a considerable amount of stress on them in the process. Modernizing and improving these grids will thus become a defining feature of the energy policies of the future. And as the sources of global energy continue to change, so, too, will the world's definition of energy security.