Global instability and burgeoning Asian demand have sent the oil price soaring, says Bill Richardson. America needs to calm the Middle East in the short term, find alternatives to oil in the medium term, and rejoin the international dialogue on climate change and energy use –

The media tell different stories when they discuss Iraq and China, but global energy uncertainty links them. We are at a critical juncture on energy prices and supplies because of international tensions, especially in the Middle East, and changing growth patterns concentrated in Asia. Global-oriented leadership by America and its allies is needed more than ever to calm the situation and assure the world’s energy and economic future.

Conditions for this leadership are challenging, to say the least. As we are painfully aware, oil prices have been setting record highs (at least in nominal terms) almost daily, reflecting both an instability premium as well as a substantial cumulative reduction of physical oil supplies, largely from a decline in Iraqi oil production. More than three years after the terrorist attacks of 9/11, the United States is hunkered down in Iraq and Afghanistan, the outcome of the war remains uncertain, and global terrorism has transformed itself into a homeless, loosely affiliated enemy of the community of nations.

Terrorists have attacked targets inside Saudi Arabia, which has the world’s largest oil reserves and is the only country with the ability to develop excess production capacity quickly and to alter market conditions at will.

The Israeli-Palestinian conflict shows no signs of abating and is a source of tension between the allies of Israel and the oil-rich nations of the Middle East.

Iran, surrounded by the US military in Iraq to the west and Afghanistan to the east, has smothered a nascent reform movement.

Emboldened by a timid response to North Korea’s nuclear programme, that country is developing nuclear capability. International efforts to limit this show little effect to date.

The oil squeeze

In addition to this profound political unrest, trends in world oil markets are adding to global energy anxieties. Oil consumption has soared, driven by Asia’s superheated economies. By 2025, Chinese oil demand will double or triple. Overall Asian consumption will increase by more than four-fifths in the same period. The benefits of economic growth have a big impact on energy markets and the global environment – at least under current circumstances.

Oil demand is especially problematic because so much is related to transport, for which there are no large-scale, economic alternatives. And it looks now as if the number of cars will double over the coming 20 years, to 1.3 billion by 2025, with much of this growth in China and India.

Whether or not experts are right in saying that global oil production has peaked, or will soon, recent exploration and production investments have produced generally disappointing results. No super-large fields have been discovered in decades, and the marginal barrel of oil is increasingly heavy and sour. At the time of writing, oil prices were above $55 a barrel – 60% up in a year. Natural gas markets have also reflected sudden change; in America, prices have been far above average for almost four years, putting pressure on businesses and consumers.

Today’s record-breaking oil prices, resulting from instability and too much demand chasing too little supply, pose a threat to an already-sluggish world economic recovery. At the same time that capital is in demand to finance America’s growing debt, international capital is chasing higher-priced energy, a dynamic that could raise US interest rates and compound the costs of the federal deficit. None of that bodes well for the economy of our nation – or that of the globe.

In spite of these urgent and crushing problems, meaningful energy policy has eluded the grasp of the White House and Congress.

In energy policy, as in other areas, regional and partisan politics and special interests have overwhelmed both the process and the promise of any unified commitment to a long-term energy strategy that moves us toward energy diversification and self-reliance.

The situation sounds bad, and there’s reason to be deeply concerned. The question facing global leaders is: how do we turn today’s situation into a more promising future?

The importance of the Middle East

Let’s start with the obvious. Continuing chaos in the Middle East will roil oil markets, with spillover effects across other energy markets as well. There are now huge disincentives to invest in new production capacity in much of the region, even as production from Iraq has been curtailed. The chaos has also produced a cycle of regional instability, high oil prices, greater instability, higher oil prices and, ironically, unprecedented oil profits that can fund more terrorism and insurgent activity.

Peace in the Middle East, not just as an element of national security policy but of oil policy as well, must be the top priority of the US and its allies. Instability in other key producing regions, such as Nigeria and Venezuela or Russia, also reverberates throughout the world’s economy. Future American diplomatic efforts should openly address this fact and we should invest time, effort and resources to ensuring stability in the world’s key oil-producing regions.

It is critical that we acknowledge – in words and actions – the global nature of energy issues. It is critical that America empower and participate in global and regional organizations and activities that are designed to promote energy cooperation and mitigate energy tensions.

On a related point, the consuming nations must engage the Organization of Petroleum Exporting Countries (OPEC, the oil producers’ cartel) in a much more effective way. Cartels are anathema to free markets, and the US government rightly remains firmly opposed to manipulation of oil supplies. American consumers are justifiably suspicious of OPEC. Over the long term it is the government’s obligation, working in concert with industry, to reduce America’s dependence on oil. But engagement with OPEC is critical, particularly as we enter a period of greater global competition for oil supplies. And OPEC will benefit from stability and predictability, just as consuming nations will.

Our people know that US energy policies are in tatters, and that we place our nation and the global economy in peril by being so reliant on oil – overseas oil in particular. They want action even if Congress and the administration have been paralyzed by special interests. As chairman of the Western Governors’ Association, I was pleased to work with Arnold Schwarzenegger, governor of California, earlier this year to pass, with unanimous and bipartisan support, a resolution laying out ambitious clean energy and energy-efficiency goals affecting 18 states. The states can do a lot and are working together regionally, from the north east to the west coast, to implement energy-saving and diversification strategies.

Cleaning coal

In a broader context, we need to address the environmental implications not only of oil and gas consumption but of coal consumption as well. Greenhouse gas emissions from coal and other fossil fuel combustion cannot be confined within national or even regional boundaries. Without significant global cooperation, including the participation of developing nations, we cannot effectively address the impact of greenhouse gases on the climate.

In addition to their surging demand for oil and gas, China and India have large, indigenous coal reserves that they are actively and rapidly developing to power economic development. Because conventional coal combustion inherently releases two to four times the carbon of other fossil fuels, the world needs to support the Asian nations’ interest in zero-emission combustion technologies that allow the separation and sequestration of potential greenhouse gases, as well as the liquefaction of coal for transport fuels. I also recognize that in some respects America needs to catch up in implementing advanced coal technologies.

Enabling the environment-friendly use of coal will require the development of an international consensus on climate change, along with coordinated actions and investments. Russian leaders have now embraced the Kyoto protocol, which could further isolate America from its European allies, and that places Russia in an enviable negotiating position. It’s time for America to rejoin the international dialogue on climate change and energy use.

Further, the growing need to move oil and gas over longer distances from producing regions suggests attention needs to be given to securing supply chains. New routes for liquefied natural gas and major transnational pipelines will tie nations, markets and regions together. These new trade routes will require joint protection agreements which, in turn, suggest new geopolitical alliances – for example, those that might be associated with long-distance pipelines from Russia to Japan and other points east.

An alternative to oil

In the end, technology offers the greatest source of optimism for the world’s energy future. Events in the Middle East, trends in oil and gas production, and global energy demand growth all suggest a highly focused research portfolio, and new research models for applied energy research and development that are specifically designed to address American and global energy needs in a more effective and sequenced fashion.

Investment in automobile efficiency is probably the single most important technology investment to help reduce global oil demand in the near to mid term. America also needs to invest in refinery upgrades, initially to accommodate heavier conventional crudes and to meet near-term environmental requirements, as well as to meet the potential refining needs for heavy oil in the mid to longer term.

It is also prudent for America to invest in unconventional natural gas reserves. While the country has just 5% of the world’s proven gas reserves, it has almost 1,300 trillion cubic feet of technically recoverable reserves, enough to meet current demand for the next 60 years. Development of these resources could moderate natural gas prices by increasing available domestic supply and provide protection against any long-term potential gas cartel development.

In addition, investment in carbon sequestration and clean coal technologies will enable the use of the world’s abundant coal resources without further environmental degradation from coal combustion. Perhaps most important, substantial investment in renewable fuels, liquid fuels, and hydrogen has the potential to transform our dependence on the petroleum-powered internal combustion engine. Policies to rationalize these investments and ensure the marketplace acceptance of new technologies should be carefully and coincidentally crafted.

If this all sounds somewhat alarmist, this discussion has satisfied its intent. Runaway energy consumption and its environmental consequences, along with competition for the world’s scarce energy resources, suggest the advent of perilous times and the need for new alliances. Further, the stability of the Middle East, because of its role as the “energy bread basket” to the world, is fundamental to the world’s economic health. The world is travelling down an energy path that is dangerous in the short term and unsustainable in the long run. We need to confront honestly global energy consumption, adjust our thinking to accommodate new energy realities, and adopt policies to create new ones.

International cooperation is critical to meeting the world’s energy needs peacefully in ways that maintain our economic growth and preserve the global environment and public health. Smart investments and even smarter policies will radically alter the energy equation, but we have little time to lose.

Bill Richardson
Democrat Bill Richardson is governor of New Mexico. He was United States energy secretary from 1998 to 2001 and United States ambassador to the United Nations from 1997 to 1998.