Center for Global Risk and Security A Strategic View of Energy Futures Gregory F. Treverton November 2007

Treverton-2 Focus is on political implications To be sure, price a pump hurts, but so far little economic impact on rich countries; Real issues are political: –Who gains, who loses, and how? –What does this mean for the United States? –How is the nature of international energy changing?

Treverton-3 The basics are critical, and often gotten wrong Oil is fungible: –So price is what matters; –Individual countries cannot be “embargoed” (with rare exceptions); –And talk of “the United States gets Y percent of its oil from Z” is nonsense. Gas is not (yet): –So pipelines are critical, and producers and consumers are tied together in long- term arrangements.

Treverton-4 Other basics are more controversial in fact Oil and gas will dominate for as far as the eye can see: –Current oil reserves = 41 years current production; –For gas, 63 years Those fuels are concentrated in unhappy places, the strategic ellipse – see next slide; Coal is abundant and abundantly distributed, so it is the main alternative (but still dirty) – 147 years; Step function in energy demand – 1.6 percent yearly but 1.9 percent or more now

Treverton-5 Oil and gas reserves are highly concentrated in the strategic ellipse 71 percent of conventional global oil reserves 69 percent of global gas reserves

Treverton-6 Key wildcards are five How big the effect of global warming? How fast China and India climb the energy ladder to much lower energy intensity? How fast renewables, especially biomass technology, come on line –Current ethanol subsidy is farm, not energy program How fast nuclear grows? –2004: 40 nuclear plants for 14 percent of Chinese energy (viz. 655 coal fired plants) Coal is main alternative, so how fast cleaner coal? –Half of U.S. electricity

Treverton-7 Winners and losers matter to the United States Big winners are Russia and Iran – more on Russia later as case study; Big losers fall in several categories: –Oil-poor poor countries in Africa (and perhaps twice hit with global warming); –Strategic but precarious not-rich countries, like Pakistan: High prices may cost it on the order of a tenth of GNP –Newly oil-rich are also potential “losers,” for riches are rents worth fighting over (and even the Dutch succumbed to the “Dutch disease”)

Treverton-8 Democracy is also likely to be a loser Oil revenues let autocrats “buy off dissent”: –High prices “oiled” Putin’s rise to more absolute power; –So, too, reform typically undercut by higher energy prices in Iran; Research suggests 7-10K per capita the critical zone: –Unwindings of authoritarian regimes most likely in that range; –Above 10K, both democracies and autocracies likely to consolidate

Treverton-9 Less noticed is change in structure of industry Days of “seven sisters” long over; National oil companies (NOCs) now control most oil, as international oil companies (IOCs) have seen their “control” drop from 85 percent in 1970 to less than 7 percent now; “Oil nationalism” is thus a real factor, but mostly on supply: –Investment needs are huge – for Russia almost a trillion dollars through 2030 –Mexico might become a net importer by 2020

Treverton-10 For Russia as energy superpower, not as easy as it looks Chinese gas market no alternative to Europe: –2030: 80 bcf. Vs. 500 bcf. In Central Asian oil and gas, the two are rivals; –China's energy deals deprive Gazprom of an indispensable fallback –Russian grip on Central Asia curbs China's efforts to satisfy domestic demand: Rivalry has started to become visible –SCO no longer nucleus of regional energy org’n –Several high-profile Sino-Russian energy contracts are on hold

Treverton-11 Paradox is Gazprom is running out of gas Requires $400B in investment to 2030

Treverton-12 Looking backward, looking forward Predicting oil prices: best for weather is continuity; What got wrong in last half century: –1950 would have bet on technology, nuclear; –1971 would not have bet intensity came down so fast (alternatives like Brazil); What for future: –Are in energy transition, change in demand seems real and permanent (but Brazil); –Note that previous energy transitions driven by technology, not energy scarcity.

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