Copyright 2006 Foster Associates, Inc.
All Rights Reserved
Foster Natural Gas Report
April 7, 2006
SECTION: Report No. 2586; Pg. 7

LENGTH: 1625 words

HEADLINE: SUPPLY DIVERSITY NO LONGER KEY TO ENERGY SECURITY, SAYS DANIEL YERGIN; ENTIRE SUPPLY INFRASTRUCTURE MUST BE PROTECTED; CONSERVATION IS "UNDERRATED"

BODY:


paradigm of energy security for the past three decades is too limited and must be expanded to include many new factors," writes Daniel Yergin in the March/April issue of Foreign Affairs, published by the Council on Foreign Relations. The emergency system developed in response to the 1973 Arab oil embargo must now encompass the entire energy supply chain and all related energy infrastructure. More and more, that includes long-distance, cross-border pipelines as well as seaborne transportation of oil and liquefied natural gas (LNG). The many choke points along energy routes create security risks that call for additional monitoring and development of multilateral rapid-response capabilities. Yergin aired his views in anticipation of the meeting this July in St. Petersburg of the so-called G-8, the group of eight highly industrialized countries. Energy security "will be the number one topic" on the agenda, he said.

Ensuring Energy Security

Amid talk of the United States' "energy independence," Yergin argues that the gradual integration of global energy markets places a premium on quite the opposite - energy interdependence. He describes the creation of a new paradigm as "an awesome task" that will make energy security "one of the main challenges for U.S. foreign policy in the years ahead." In the United States alone, there are more than 150 refineries, 4,000 offshore platforms, 160,000 miles of oil pipelines, facilities to handle 15 million barrels of oil a day of imports and exports, 10,400 power plants, 160,000 miles of high-voltage electric power transmission lines, millions of miles of electric power distribution wires, 410 underground natural gas storage fields, and 1.4 million miles of natural gas pipelines. None of these domestic facilities - or global energy systems outside the United States - were built for the kind of security that he is talking about. Moreover, Hurricanes Katrina and Rita demonstrated how fundamental the electric grid is to everything else. After the storms, Gulf Coast refineries and large U.S. pipelines were unable to operate not because they were damaged but because they could not get power.

On the eve of World War I, Winston Churchill declared diversification to be the key to British energy security, observed Yergin. "Safety and certainty in oil lie in variety and variety alone," Churchill stated. Supply diversity is still important, but Yergin believes that the new paradigm must recognize the rapid evolution of global energy trade, supply chain vulnerabilities, terrorism, and the integration of major new economies. Beyond access to oil, concerns about energy security include power blackouts on both the East and West Coasts of the United States, in Europe, and in Russia; as well as chronic shortages of electricity in China, India, and other developing countries. As for natural gas, "rising demand and constrained supplies mean that North America can no longer be self-reliant, and so the United States is joining the new global market in [liquefied] natural gas that will link countries, continents, and prices together in an unprecedented way." In the United States, LNG currently meets only about 3% of demand, but it could reach more than 25% by 2020. By that time, the volume of global LNG trade will triple to 460 million tons, he estimated.

After the 1973 Arab oil embargo, industrialized countries took measures to ensure coordination in the event of supply disruption and to deter use of an "oil weapon" by exporters. These measures included the Paris-based International Energy Agency (lEA) representing the industrialized countries; strategic stockpiles of oil including the U.S. Strategic Petroleum Reserve; continued monitoring and analysis of energy markets and policies; and energy conservation and emergency sharing of supplies. Notably, they did not include any effort to manage prices and the commodity cycle.

Energy security now requires countries to abide by several principles, Yergin continued. The first, as suggested by Churchill, is to ensure a variety of sources, which reduces the impact of a disruption and benefits both consumers and producers for whom stable markets are a prime concern. But diversification is not enough. Resilience in the form of a "security margin" provides a buffer against shocks and facilitates recovery after disruptions. As examples of this second principle, the Foreign Affairs article cites spare production capacity, strategic reserves, backup supplies of equipment, adequate storage capacity along the supply chain, and stockpiling of critical parts for power production and distribution, as well as emergency response capability.

Facing the reality of integration is a third principle. "There is only one oil market, a complex and worldwide system that moves and consumes about 86 million barrels of oil every day. For all consumers, security resides in the stability of this market. Secession is not an option." Lastly, high-quality information underpins well-functioning markets. Here, the lEA has led the way, and its work is being complemented by a new International Energy Forum that will attempt to integrate information from producers and consumers. Timely information is crucial in a crisis, when consumer panic can be instigated by a mixture of actual disruptions, rumors, and fears.

The recognition that an energy security system must be global necessitates the engagement of China and India, as Yergin sees it. According to the article, any serious controversy that arises between the United States and China over oil or gas will likely arise not out of competition for the resources themselves but because they loom large in foreign policy decisions. "Indeed, from the viewpoint of consumers in North America, Europe, and Japan, Chinese and Indian investment in the development of new energy supplies around the world is not a threat but something to be desired, because it means there will be more energy available for everyone in the years ahead." But engaging China and India requires an understanding of what energy security means to them. The primary concern for both is to ensure they have sufficient energy to support economic growth and prevent energy shortfalls that could trigger social and political unrest.

Assuring the security of global energy markets will require coordination on both an international and a national basis among companies and governments, including energy, environmental, military, law enforcement, and intelligence agencies. However, in the United States and in other countries, "the lines of responsibility - and the sources of funding - for protecting critical infrastructures such as energy are far from clear." The private sector, the federal government, and state and local agencies must take steps to better coordinate their activities and maintain their commitment even during periods of low or moderate energy prices.

Yergin insists markets are "a source of security in themselves." Large, flexible, well-functioning markets provide security by absorbing shocks and allowing supply and demand to respond more quickly and with greater ingenuity than a controlled system. Such markets will guarantee security for the growing LNG market and thereby boost the confidence of importing countries. Accordingly, "governments must resist the temptation to bow to political pressure and micromanage markets. Intervention and controls, however well- meaning, can backfire, slowing and even preventing the movement of supplies to respond to disruptions." Compared to reactions in the 1970s, after Hurricane Katrina "markets were back in balance sooner and prices came down more quickly than almost anyone had expected" as a result of regulatory and environmental flexibility. The Jones Act, which bars non-U.S.-flagged ships from carrying cargo between U.S. ports, was waived to allow non-U.S. tankers to move Gulf Coast supplies around Florida to the East Coast. At the same time, "boutique gasoline" rules were temporarily lifted in order to move supplies from other parts of the country into the Southeast.

Finally, the U.S. government and the private sector should also renew their commitments to energy efficiency and conservation, Yergin added. "Although often underrated, the impact of conservation on the economy has been enormous over the past several decades," Yergin said. Specifically, over the past 30 years, gross domestic product (GDP) grew by 150% while U.S. energy consumption grew by only 25%. "In the 1970s and 1980s, many considered that kind of decoupling impossible, or at least certain to be economically ruinous." Yergin acknowledged that many energy efficiency gains are due to the fact that GDP now reflects less manufacturing and more service industries, especially information technology, than could have been imagined in the 1970s. "But the basic point remains: conservation has worked. Current and future advances in technology could permit very large additional gains, which would be highly beneficial not only for advanced economies such as that of the United States, but also for the economies of countries such as India and China . . ." In fact, Yergin added, China has recently made conservation a priority. Finally, the investment climate is a key concern for energy security. There must be a continual flow of investment and technology in order to develop new resources. The lEA recently estimated that as much as $17 trillion will be required for new energy development over the next 25 years. "These capital flows will not materialize without reasonable and stable investment frameworks, timely decision-making by governments, and open markets." How to facilitate such investment will be one of the critical questions on the upcoming G-8 agenda.

LOAD-DATE: April 10, 2006