1. NS3040 Summer Term 2018 Economic Security: Resources
Federal Reserve Bank of Chicago, Strong Dollar Weak Dollar

2. Resource Security
Daniel Yergin, Ensuring Energy Security, Foreign Affairs, 2006
Classic article outlining strategy for countries to pursue in minimizing risks from energy shocks and supply interruptions
Theodore Moran, Feeding the Dragon, Milken Institute Review
Examines Chinese resource strategy to see if country is trying to tie-up world supplies of strategic resources
Michael Ross, Blood Barrels: Why Oil Wealth Fuels Conflict, Foreign Affairs, 2008
Attempts to explain the oil curse
Why many oil producing countries are prone to conflict, instability, and poor economic performance

3. Daniel Yergin: Ensuring Energy Security I
Energy security a major issue since Churchill’s time – shifting British Navy from coal to oil
Churchill’s advice: “Safety and security in oil lie in variety and variety alone”
Energy security focus often driven by tight oil markets and high oil prices, but new concerns in recent years:
Power blackouts more common
Increased risk of terrorist attacks to energy infrastructures
Instability in many producing countries
Increased threat posed by Iran
Natural disasters seem to be more frequent

4. Daniel Yergin: Ensuring Energy Security II
“Energy Security” means different things for different countries:
Developed world – availability of sufficient supplies at affordable prices
Energy exporting countries – security of demand for exports
For Russia, aim is to reassert state control over strategic resources and gain primacy over main pipelines to international markets
For China and India – their ability to rapidly adjust to their new dependence on global markets after long standing commitments to self sufficiency
For Japan – how to manage dependence on imported natural gas --
For many countries – whether to build new nuclear plants and perhaps return to clean coal
For Canada -- access to U.S. and Chinese markets

5. Daniel Yergin: Ensuring Energy Security III
Main principles for energy security
Original energy security system created in response to 1973 Arab oil embargo
International Energy Agency (IEA) created
Intended to ensure coordination among industrialized countries in the event of supply disruption
Encourage collaboration on energy policies
Avoid hostile scrambles for supplies and
Deter any future use of an oil weapon by exporters
Early actions to increase energy security
Strategic petroleum reserve
Encourage increased exploration, technology, alternative energy

6. Daniel Yergin: Energy Security IV
To maintain energy security – key principles
Churchill’s diversification of supply still important
Oil is abundant and peak-oil not yet a problem
Resilience – develop a security margin in the energy supply system – buffer against shocks
Recognize reality of integration – there is only one oil market -- a complex and worldwide system
For all consumers, security resides in the stability of this market
Importance of information
High quality information underspends well-functioning markets
IEA has led way in improving flow of information about world markets and energy prospects

7. Energy Trilemma

8. Michael Ross: Blood Barrels I
Wants to explain why conflict developing country oil producers.
Not just oil – conflict often associated with diamonds and other minerals
These countries often have a hard time sustaining growth for long periods of time
Many have been plagued with:
High levels of debt,
High unemployment
Sluggish or declining economies
Half of members of OPEC were poorer in 2005 than they had been in 1975
Countries that had seemed on verge of great promise, Algeria, Nigeria, Iraq, and Iran were unable to capitalize on oil

9. Michael Ross: Blood Barrels II
Some causes of instability and poor performance
Dutch Disease – tendency for exchange rate to become overvalued
Discourages diversification
Hurts non-oil export industries
Sudden glut of revenues
Few countries have fiscal discipline to invest windfalls prudently
Many White Elephants
Governance problems
Tends to be increase in corruption
Tendency for more authoritarian governments

10. Michael Ross: Blood Barrels III
Biggest danger associated with oil – armed conflict
Among developing countries, oil producers twice as likely to suffer internal rebellion
Oil wealth can trigger conflict in three ways
1. Can cause economic instability which leads to political instability
When people lose jobs become more frustrated by government and easier to recruit into rebel armies
Most oil producers have periods of booms and busts – during busts, government has harder time financially combatting rebel or separatist groups

11. Michael Ross: Blood Barrels IV
2. Oil wealth often helps support insurgencies
Raising money is relatively easy – steel oil and sell it on black market
Get foreign financing on promise of friendly deals once in power
Extort money from companies in remote areas
3. Oil wealth encourages separatism
Oil and gas often produced in enclaves that provide considerable revenue for central government, but few jobs for locals
Locals feel not getting fair share – want autonomy

12. Threats to Oil Companies

13. Michael Ross: Blood Barrels V
Possible ways to combat problems – no single way to bring peace to oil producing states
1. Cut off funding for insurgents who profit from oil trade
Refusing to buy oil that is sold by insurgents
2. Encourage governments of resource-rich states to be more transparent
Lack of transparency facilitates corruption and reduces public confidence in state
3. Help oil states better manage the flow of their oil revenues – companies should bear more of risk of volatile prices
Not mentioned by Ross – direct payment to population – sharing of oil wealth directly

14. U.S. Oil Imports: Venezuela
Venezuela: Falling Production
EIA, Political Risks Foocus Attention on Supply of venezuelan Oil to the United States, January 22, 2013

15. Venezuelan Oil Exports, 2011
Venezuela Regional Trade -- ALBA

16. U.S. Crude Oil Supply, 2012
U.S. Import Picture

17. T. Moran: Feeding the Dragon I
Asks question:
Has China embarked on a long-term strategy of controlling access to natural resources from around the world?
A plausible case could be made:
Japan attempted to do something similar in the 1930s
China may be anxious to reduce its dependence on the commercial goodwill of foreigners
Rapid sustained economic growth would be far more difficult without large and growing imports of resources
China might fear some sort of future resource-linked sanctions – human rights, refusal to join climate accords etc.

18. China’s Global Investments
Smart Planet Daily, October 23, 2013

19. T. Moran: Feeding the Dragon II
Argues while can make a plausible case that China is trying to control world supplies of resources
Chinese companies have taken equity stakes in African oil fields
Extended loans to mining and petroleum investors in Latin America
Written long-term procurement contracts for minerals and natural gas from Australia
Important question is
Whether or not these steps reduce other buyers’ access to world supplies, or
Actually might these tactics actually serve the interests of non- Chinese buyers – increasing global supplies.

20. T. Moran: Feeding the Dragon III
Need to look at the evidence.
Best done by examining Chinese natural-resource procurement deals
Four broad types of Chinese resource transactions:
1. Equity stakes in large, established producers
2. Equity states in start-ups and small producers aiming for expansion
3. Loans to established producers in which the debt is linked to a purchase
4. Loans to back the expansion of small developing firms
1 and 3 simply gives a Chinese company a legal claim on the output of an established producer
Has zero sum implications
China’s access comes at the expenses of other importing nations

21. T. Moran: Feeding the Dragon IV
If deals were 2 or 4
The procurement arrangements expands and/or diversifies output – all resource users stand to gain
Moran then examines China’s 16 largest procurement deals from 1996 – 2009
Resources included oil, natural gas, bauxite, copper etc
Some cases (3 of 16) where Chinese companies took an equity stake to create a “special relationship” with an established producer
Typical pattern (13 of 16) was for Chinese enterprises to
Take equity stakes or
Write long-term procurement contracts with producers that operate at the competitive fringe and need Chinese capital and expertise to expand
Everyone gained

22. T. Moran: Feeding the Dragon V
Rare earths and Lithium – Exceptions to Rule?
More than 90 percent of rare earths used in U.S. now come from China
Driven by cost not scarcity
However concern over Chinese restricting exports
Many rare earths used in high-tech products, green technologies
Potential danger here that China might try to lock up other supplies of rare earths
Lithium important for high performance batteries
China currently the leading producer
However lithium available from many regions
Half world reserves in Bolivia

23. T. Moran: Feeding the Dragon VI
Summing up
Finds much of China’s resource investment is flowing into regions and countries avoided by Western investors
Sudan, Iran, Zimbabwe
China does not make demands for improved governance
Feels concerns about China’s push to secure resources well grounded but probably misdirected
Over-all effect so far has been positive
Primary reason that Chinese policies are making resource markets more competitive rather than less is China’s willingness to invest where other’s won’t
Concludes China a problematic partner in efforts to coax outlier states into the global civil society

24. China’s Risky Portfolio
FT Big Read: China, October 14, 2016