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March 10, 2005
(Continued from: The World Over a Barrel: The Politics of Energy, part 1)
The US is increasingly dependent on China, the other way around, for the dollar not collapsing, or totally collapsing.
You are right, demand in the last five years has increased at an amazing rate and has been spurred by two countries and it’s always easy to accuse the Chinese of getting our oil, but its also the US. I mean the countries that have really increased strong demand in the past year are the US and China, there is some relationship in terms of the dependence on each other and oil. And the Chinese are getting a little scared about their own dependency on oil and they have done a few things.
One is what we see right now, with Chinese oil companies going and buying some assets in various regions of the world. It has major intentions but I think that is has not bought a lot of real assets yet. What I think really scared the US in the past few months was seeing Chinese companies in Canada and Venezuela and such was described to me by a US official who said the Chinese were coming to get US oil and that has resonance with the States.
China is very dependent on Middle East oil like all the Asian countries. However it is not yet pushing to create a navy for example to go police the Gulf, as the US has done. You don’t have programmes to build navies in China. Likewise China has two very different foreign policies. On the one hand China has dragon policy, which is quite muscular and we see that with Taiwan, and the other is foreign policy, global foreign policy that is more dependent on the US policing places so the oil channels remain open. It is very difficult to imagine China being able to provide the security umbrella the US does right now in the Middle East. It does it only with really one country and very marginally, with Iran.
It is also difficult to imagine that in the next 10 years China will be able to change its strategic stance to correct its vulnerability in terms of oil. So the likelihood is great that China will do something else, such as have different energy policies, become less dependent on oil, etc. And I think that it’s more likely that we will see a very sharp turn in Chinese energy policy where the whole issue of efficiency and conservation are concerned. Measures will be introduced very early in the cycle, as demand is taking off. It’s much easier to replace or to add new capabilities that are a lot more efficient going to the future, than it is to replace the one you have. So I would imagine ten years from now or in the next five years China will have a very aggressive conservation policy in terms of energy.
I think we’ll see quite a change in the axis over the next ten years or maybe 20 years as both China and India increase their appetite for energy. I think that the change of axis is going to be from central Asia, Russia, India and China doing deals bilaterally or unilaterally with Iran and with other international states. It’s off the subject of terrorism but I think we’re going to see a marked change in policies in the next 20 years, driven by energy.
Back to my environmental point, the three countries that produce more than half of the greenhouse emissions are the US, at 25%, China 18% and India about 9%. The second two are going to go up quite dramatically as their economies expand and even if China were to undertake, and I think they will, conservation measures, they are still going to be enormous consumers of carbon based fuel, particularly coal. And not clean coal at that. So on both the energy consumption and environmental side I think that both these countries will continue to experience growth in terms of their consumption and the production of destructive emissions. The US and China are developing this incredible complicated relationship, whereby we will probably end up guaranteeing their oil supplies with our military forces, army and navy. They will continue to guarantee to buy our debt and guarantee our consumptive and wasteful lifestyle and we will continue to be concerned about their growth as a political and military power.
I have 3 questioners.
Delegate from the floor
Thank you. My name is Tim; I’m from the Netherlands. I have a questions for you Mr. Morrison, you said you didn’t envisage huge catastrophes as a direct result of terrorist attacks. And we can distil from senator Hart’s comments that the oil and energy industry can be viewed in a sense as a direct interest of the US, especially in the Middle East where terrorists are working on effects and are actually trying to aim at symbols. Their attacks on the energy sector are actually direct attacks on the US. Could you envisage a catastrophic effect of the accumulation of these small terrorist attacks that would lead the oil cartel to make a decision that is not entire friendly to the US, for example, to go and measure their output in euros in stead of in dollars.
Another question is coming back to the China industry question we just had, are we not overlooking that in China and central Asia itself there are huge reserves of national energy, energy reserves in Kazakhstan, and Turkmenistan, and don’t China and industry have the advantage of land and direct land access to these resources?
I think that we are talking about the terrorists’ abilities to cause regime change, because that would have an effect on supplies of oil to the states.
Terrorists are unlikely to be able to do very much to disrupt the supplies of oil before bringing about regular change. As I mentioned earlier, they can have an effect on the oil price by carrying out individual acts but I don’t think they have the capacity or intent to embark on a sustained attack on the oil industry in the Middle East. Why do I say that. Is it in their own interest to destroy the oil industry in Saudi Arabia? The answer is probably not. It’s in their interest to effect the western economies by mounting a tax on the oil industry but it’s not in their interest to destroy it. Because if they do create regime change and they have a government coming in or regime which is sympathetic to their aims then obvious they will want to have that resource for their own use and one saw that in Iran. In the regulated change there. They certainly didn’t come in and attack their own facilities because they knew their own economy and the well-being of their own people was going to be dependent on that oil resource. So I think in my view that we will not see a situation of terrorism, or the capacity to mount a catastrophic attack against the industry in the Middle East.
Briefly, the other question was the availability of central Asian resources to China and India and the difference that would make.
It does not make any difference. You would be importing oil from somewhere else but the fact remains that there would still be increases as a result of events in the Middle East, and the reserves are not that big in central Asia. They can help China and India diversify their source but again this is a global market and its like a big top, you remove oil from any part of the top and prices go up so the dependence is mutual for everyone. If you have a bomb attack in Venezuela and you are not importing one barrel from Venezuela your oil prices are still going to go up, so the question is how do you control demand globally to make sure you are not so dependent on the constant fear that it will go up.
[...] They have a competitive disadvantage there; I can’t imagine that doesn’t have an effect either strategically or economically.
You have a strategic gain, which is energy security. Everybody is trying to secure oil. I’m not saying that the interests in China and India don’t exist, I’m saying it doesn’t replace the importance of the Middle East.
Delegate from the floor
If you look at the mid and long term I believe everybody here creates certain consequences. And my first question to you is what is the answer for example of the international system. Do we leave this oil to the free market place like is done currently, that is one option, looking to increase prices. Do we leave it for example to some nations who have the military muscle to safeguard the oil interest, like has happened throughout history, in some cases? Or what is the role for example of various international organisations, and I would like to take the proposal from senator Hart which I find interesting but I’m wondering if it fits in with our policies. My question is can we imagine having a protocol like Kyoto on energy and what is the role, for example, of WTO and other organisations in view of this current challenge?
I think your question is about whether oil pricing and allocation should be left to the free markets and possibly just the law of the jungle in terms of the strongest countries muscling in to secure supplies or whether there should be some international agreement to govern the pricing and allocation of this increasingly scarce resource. My belief would be that eventually the price would go high enough that alternatives to oil, which could really only be the hydrogen fuel cell, will eventually appear.
Except as Mr. Diwan has pointed out, there is no free market for oil, it is a cartel and this cartel has been able to do what it wants. For example, we have in my state of Colorado and in that region- north west corner of Colorado, south west corner of Wyoming and a bit of Utah, a resource called oil shale. A few years ago it was estimated that there was more oil equivalent in that region, a fairly small region, than in the whole Persian Gulf. The problem was getting it out of the rock. It is not a complicated process but an expensive one. The late Armand Hammer (in the late 70s I think), re-activated some works that his companies owned in the region because oil was up at 44 $ a barrel. Of course any time Mr. Hammer or anybody else puts 50 or a 100 or 250 or a billion dollars into something, the cartel can drop the price by a couple of dollars a barrel and you’re stuck with that investment and that’s why the oil industry is not looking at those kinds of alternatives, oil shale, car sands in Canada, lots of petrol-based and carbon-based fuel supplies. They are a function of the market and yet it is not a free market as others have pointed out, so this makes it very difficult financially, to get the investment to produce these much more secure supplies.
Question. There are obviously very good environmental and geopolitical reasons to shift more to natural gas as you have all said. The biggest supplies of natural gas and the biggest reserves are in Russia, and Europe of course right now as you know is investing considerably in that, in particular to meet its protocol obligations. Now if we take this Zakaria thesis seriously what might be the implications for democracy in Russia, shall we say its being challenged as it is already.
I think your question contains its answer. If you subscribe to the Zakaria thesis as I do. Being a resource-rich country, in this case energy reserve-rich enables you to bypass reform and democratisation then it follows that as Russia moves into the mainstream as a supplier of oil and gas it will have less pressure to democratise as it can filter down revenue to the average citizens in ways that will pacify them or buy off the opposition or whatever, which is unfortunate. This gets us into a long discussion. I think the US made some terrible mistakes in the 90s by not being more aggressive at bringing Russia into the West. Rebuilding and restructuring the Russian infrastructure and a lot of other steps that could have, not necessarily would have, but could have avoided the situation into which Russia is now heading.
If you look at the economic strategy of Putin, that choice has been made. Russia is just going to become an exporter of resources. We see it in the oil sector and we can see it in seven other sectors, which are all natural resources. If you look at the demographics and industrial base, basically Russia does not have the option to follow the Chinese strategy. The only resources that exists are natural resources and very early on the administration has controlled these. Since then everything that has been done since is to make sure that the state controls the natural resources, that’s it.
Delegate from the floor
Gabriel Rithkin from Oxford Research Group. Thank you to the entire panel for fascinating presentations. My question is more about motivations. You said the present American administration is not thinking about creating alternatives; it is just not in their mindset. Can you unpack a little what lies behind this? Is it do with Texan oil psyches, is it about vested interest, can you open up why there isn’t the ability to think in a more open way.
The longer I live and the more I try to answer motivation questions the less I’m able to. I’ve never been able to mind read generally and particularly mind read politicians. So you have to look at circumstantial evidence. I think it’s a combination of a kind of reiterated belief in the so-called free markets. One, which is an anomaly because in the case of energy it is not a free market. I think that means to those who are in power today, President Bush and his party, particularly the vice President, has a continued reliance on the status quo which is the American energy industry, particularly the oil industry, having invested a great deal in the Middle East and now having oil at a lifting cost at below 2$ a barrel. It has no particular interest in doing anything else. If you can lift oil, because you had amortised your cost 25 years ago, at 1.50$ or 2$ a barrel you get 54$ for it, and divide that up between yourself and the Saudis according to the agreement made a long time ago. What incentives do you have to do anything different, unless the public sector, that is to say, the policy makers of your governments tell you, that it is not in your country’s interest to do that?
There is something called the national interest, and I tried that line, without stating that our energy policy is at war with US national interest we just don’t happen to have leaders who will tell the American people that, and those interests are foreign policy, whether you subscribe to the Bush foreign policy or one that somebody else advises, on the global environment and our national security and the American people have just spoken and essentially they don’t care, or at least 51% of them don’t.
I need to correct something here. This is important. First American oil companies do not produce oil for the Arabians, it is the Saudi governments who produce it, secondly the oil companies don’t need that type of money.
I don’t disagree with the fact that the vice President in particular has sympathy for the oil industry but I don’t think it has to do with revenues or where it’s producing. I think it’s more a mindset about the free markets, an American way of life, an ideology that this is the way we are, rather than a direct interest in the oil companies. Again, they will make a lot more money in the Gulf of Mexico than they will ever make in Nigeria or Saudi Arabia
Delegate from the floor
Gentlemen thank you very much for a very informative discussion, I just want to bring it back to Iraq and ask what is the actual plan for Iraq and of course Iraq is sitting on some very large strategic reserves, if you will, underneath the soil there. When will that actually come on line, and will that actually reduce the price of global oil or perhaps, in terms of demand, lessen the demand? So basically the question: Iraqi oil- when is it going to come online and how do you think that might effect the political development of a democratic Iraq?
It’s certainly coming on very rapidly. They are not as far along as they thought they were going to be, mainly because of the act of the terrorist attacks on the pipelines, some of the installations for the pipelines, the main problem isn’t one of terrorism, it is very poor equipment and almost all the effort over the last 24 months has been in re-servicing the industry and making it capable of exporting an awful lot more oil than it is currently able to.
It won’t take much to bring it up to its full capacity. It’s getting close to it. It’s interesting there on the security side that since the beginning of this year, security of pipelines on installations has been entirely in the hands of the Iraqis, there has been no foreign involvement, no coalition forces patrolling pipelines. They obviously react to things after they happen, but patrolling the pipelines, that is, the actual physical guarding of these installations, including ministry buildings, is in the hands of the three oil companies, the northern, southern and national oil companies. And they employ about 20,000 security people. During the time of Saddam Hussein two army divisions actually provided protection to those facilities.
The situation is pretty positive. There are things happening there. The oil is starting to flow in the right sort of quantities and won’t take too much to get back on line. But it is dependent on the acts of the terrorists. It is difficult to protect the pipelines, particularly as the technology is not yet in place to close the pipelines down sufficiently quickly to prevent damage.
Iraq is producing 2.3 million barrels a day right now. It used to produce 3 million 4 years ago. To go back to 3 million is going to require serious investments and you can’t have serious investments if you don’t have security. So as long as you don’t have security the oil industry is not ever going to recover in Iraq. I think in the next five years it’s unlikely that Iraq will be at more than 3.5 million barrels per day. That doesn’t do much. Obviously Iraq has a huge amount of reserves. And Iraq in the perfect conditions will be a large producer of oil, but to do that you need to have security, you need contracts, you need to have an oil company that is capable of negotiating the oil contract, you need to be able to bring together the people to do all of that. That is a 10-year process; it is not a 2-year process. But even if Iraq is producing 6 million barrels a day in 2012-2015 it doesn’t solve any of the problems we are talking about here and more importantly it’s very difficult to imagine Iraq becoming what Saudi Arabia is, which is the strategic reserve of the world, the central bank of the markets in a way, with enough excess capacity that can bring on enough the markets enough.
Saudi Arabia plays a role that no other countries is prepared to play, which is to have built capacity that they are not using. They have two million barrels a day, which probably cost 10 to 15 billion dollars, to put in place and they are not using that, and I don’t see Iraq ever being able to do that, so it doesn’t change the structure of the old markets.
Delegate from the floor
I’m Jack Dugaulle with the International Centre on Non Violent Conflict. I’d just like to gently challenge the notion that possession of oil reserves is an absolute guarantor of authoritarian power. It depends on what the government does with the proceeds of that resource. In at least two central Asian republics today notwithstanding the fact that the authoritarian governments possesses oil reserves, there are robust civilian-based resistance movements aimed at regime change, precisely because their governments are stupendously corrupt and everyone in the country knows that because in fact there has not been a trickle down effect, perhaps because those governments have not done what other governments that possess oil resources do. It is not just a question of whether an authoritarian government has a great natural resource at its disposal as a source of revenue. It is a question of how it governs either with the use of that resource if in fact it does enrich itself, it gives its opposition an enormous organising which is present in Iran today as well as in Azerbaijan and Kurdistan.
I don’t think anyone, particularly myself, who were arguing what I would call the Zakaria thesis, would use the word absolute. There is a pattern that more probably than not suggests that oil- or resource-rich countries are the least likely to reform. That is not an absolute; it is a probability.
I don’t disagree. I’m saying if you don’t have strong institutions to start with, it’s very difficult to build them in an oil economy and there’s a lot of interest about that but there’s no statement. If you take Kazakhstan and Azerbaijan, I think with these two governments, the goal is not to become Norway, the goal is to become Kuwait and the question is what can you do there. When the goal is not to become Norway but Kuwait.
Your thesis is that the mis-distribution of oil resources and the revenue from it is so bad in some countries that for those regimes it carries the seeds of their destruction.
It can if they are extremely corrupt, which is certainly the case in Iran. And it’s the case in Azerbaijan. I know that today all the leaders of the opposition parties and certain groups in others talk about oil everyday and how it has completely deracinated their governments and so it can cut in both directions. It’s entirely a function of the relationship between the civilian sector or population of a country and their government’s awareness. Don’t underestimate the ability of an indigenous civilian population to do something about the extent to which it is tired and exhausted politically with its governments, notwithstanding the economic circumstances inside the country.
Very interesting point.
Delegate from the floor
I want to support what this gentleman is saying. If you look at Peru you’ve got a situation where certainly in the mining industry you’ve got a royalty agreement and the government is just coming on line in 2004. Supposedly this royalty is going to go half to the government and half to these communities where the mines are but given the corruption in Peru, whose central government is forcing it to centralise down to the municipal level, which in some cases decentralises corruption, it is just going to be chaos a year or two from now. And it’s very fragile- it has a very fragile government, a weak infrastructure at the municipal level and there are a ton of companies there- multinationals, that could do something about it and US governments as well as the UK that could have programmes there that would be very effective but at the community, the municipal and the central government levels corruption abounds and I don’t understand why no one is doing anything.
It’s difficult for outsiders- for oil companies- to dictate the distribution of wealth inside a country, but they can sometimes do something about corruption. There is this “publish what you pay” by some oil companies in some more corrupt countries like Angola. Some companies have started to publish what they are paying to the governments in order to get hold of leases. But I’m not sure they all are. What do you think of that?
Some governments are telling the companies that you lose your lease.
So it would have to be a united front by all oil companies to publish. There’s always an oil company willing to take the deal.
Often oil companies are blackmailed by governments because of the corruption issues, and this is a very competitive business where the resources are concerned, so its very difficult to say: I’m not going to go to Angola because I have to sign this piece of paper.
My name is .. I’m from Norway; I’d just like to follow up on the last question. As you know, a number of the majors are merging into mega-majors and in that way they are economically wise becoming bigger than the states they operate in. And so far we have seen that what they have been doing is repaying debt, buying their own stocks, and Norway is catching their heads perhaps if they are going to believe in 50$ oil and do some more wild cat dreaming. My question to the panel is: if you look at this social responsibility code that is creeping in to these major companies at least, being chairman of an oil company myself, do you see in the future that there will be alliances between governments, particularly like the US with their influence. It could be some new alliances with their consumers like China in its UN would be so dependent but could have other avenues to influence these operators, these mega-majors.
This last question goes back to an earlier question that came off Gary’s proposal for a UN zone of protection in the Persian Gulf, of oil resources and then the question about the practicality of it. Oil being a scarce commodity and a strategic commodity it has important historical influences. It doesn’t mean markets can’t work but it means that often people don’t allow markets to work (whether its producers or consumers). When the Japanese expanding empire was being pressed by US oil embargos we saw Pearl Harbour. When in 1945 we saw victorious US want to prevent armed competition for energy resources in Europe and East Asia we saw the emergence in the pattern in the US guarantee. In the late 60s low 70s it was the producers who stepped in. They had the power to take away the markets and form the cartels, which they did.
So what we are talking about, in getting out of that, is really new territory, a new era, and while the idea of international institutions in their present state, as civil protection seems wily and impractical we are all hoping. And in that context and in what should be our historical conclusion that we can’t simply trust that the markets will be allowed to operate and dominate. I wonder if the panellists would look again at the possibilities of an international system succeeding a natural, or global system which now seems to be in crisis.
That’s quite a big issue. So these two questions: one could there be an alliance between governments and the mega-majors to bring back better […]
Anyway the first question goes back to the same issue, the sovereignty of the producing countries. And it’s very difficult for foreign powers to come back and say we’re going to impose a code of conduct in Angola, it sounds like colonialism. So the question is how do you go back and force countries to behave in a certain way and how do you intervene in domestic politics. I don’t know.
The notion that the UN will take over the resources or manage that, as an Arab I find that shocking. I think is technology is a more likely, easier path, and if the technology exists to a large extent to reduce consumption and not let it grow. I mean we have hydrogen cars and we know how they function, we can have smaller lighter cars. We know all those technologies and they are all available presently at these prices. It’s a question of deployment and how much governments push for that. The dependency on oil is only going to last another 100 years. Oil is not going to run out but it will peak in ten to fifteen years from now so the decision for policies needs to be taken today and I’m not sure that the policy makers understand that, by 2020 we cant keep looking at where we’re just going to produce more and more and more, it just doesn’t exist. Resources aren’t willing in the West and it’s not reasonable to imagine Saudi Arabia producing 20-25 million barrels a day from 8 now, its not going to happen. So really the question is how are we going to employ technology to make sure that demand doesn’t grow and instead starts to shrink.
On the last question I think it’s quite important to realise that there are quite a lot of initiatives in place between the public and private sector for dealing with terrorism, if its going to expand. I’m thinking particularly about the protection of information, whereby until recently we certainly looked at nations to pass on information and I think there’s certainly a realisation now that they have to pass information across borders if they’re going to deal with this form of transnational terrorism that we’re looking at. Equally I think that there is a realisation that the private sector can offer a lot on the gathering and passing of information about the intentions of indigenous groups in places that they are operating, that is probably not available to the governments of the first world.
So I think the risk will move to cooperation on the security side between the public and the private sector. Now, whether that will lead in the more vulnerable areas, to the provision of security from within the private sector, to protect installations on a far greater scale? It does happen in certain areas but it’s not widespread. Certainly in places like Indonesia, which is one of the fastest developing economies in the Asia pacific, the governments recently announced that they expected the private sector, the investor to be responsibility for their own security on the facility. So I think there is going to be a move, driven by need, towards much closer cooperation between the public and private sectors.
America’s central organising principal, from 1947 to 1991 was the containment of communism. In the decade of the 90s that central organising principal became redundant, irrelevant, and it was not followed until almost exactly ten years later, by a third central organising principle called: war on terrorism.
Now it turns out that the terrorists that attacked America were mostly from Saudi Arabia. The rationale, if there was such for their actions, had to do with American presence there, particularly militarily but also the role that American dependence on oil in the region played and therefore we are having this discussion. So I’m actually pleased that I’ve shocked Mr Diwan, because that is the first step towards thinking different thoughts. If in fact you want to accept the status quo as a given, and therefore believe nothing different can ever be done I would completely agree with him, we’re stuck with what we have and we shouldn’t even try to think of anything new.
I’ve tried in public and private life to think of new things and I would like to think about- in an age of globalisation- where the central resource to the world economy is oil, a situation where the US army (generically defined), is not the world’s guarantor of oil for the world, that’s all.
And that deductively leads me to think of shocking ideas like not the UN operating the Persian Gulf. I never said that. That would be shocking. But declaring a zone of such importance to the world and the world’s economy not just the western economy but China, India, and a lot of other places increasingly, that it is in the worlds interest and international institutions interest to guarantee its flow. That’s all.
And we in the US will cooperate with producers and consumers, not just consumers, producers and consumers, to keep those oil flows going. If the Saudi royal family falls, the role of these new organisations I’m talking about isn’t to re-impose the Saudi royal family but simply keep the oil flowing and let the Saudis sort out what kind of governments.
Thanks a lot to the panellists. We must go now.
Thanks to Alistair Morrison for telling us we shouldn’t panic, I think we’ll hold you to that, to Roger Diwan for reminding us that nonetheless there is quite a lot of economic concern at the lack of spare capacity leading to the vulnerability and volatility in the energy markets and to Gary Hart for his radical vision of how someone else might police energy.
Thanks a lot.