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Energy Security Policy-Bryne Purchase

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					North American Energy Security and Energy Policy
Bryne Purchase Queen’s Institute for Energy and Environmental Policy

PRESENTATION OUTLINE
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Reminder of importance of energy to the North American way of life, provide a definition of energy security; Outline a few historical facts on oil and geopolitics; Review the current geographic concentration of fossil fuel reserves and our growing vulnerability to oil, and potentially future natural gas, disruptions; Describe briefly why energy industry economics can lead to dramatic price change and the potential macro-economic impact of major supply disruptions; Conclude with some questions about Canadian energy policy and open the floor for discussion.

North American Energy Security
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North American culture is truly an energy based culture:
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consume about 29% of world’s annual energy supply but represents only 6.9% (443 million) of the world’s population (6.5 billion). extreme dependence on hydrocarbons (84.3%) as primary source of North America’s energy supply: oil (40%); natural gas (24%); and coal (20.3%).

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What is energy security? A reasonable degree of assurance that:
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a prolonged supply disruption will not occur; and/or that, if it does occur, its impact will be tolerable.

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The terms “reasonable degree of assurance” and “tolerable impact” are inevitably subjective. But then security of any kind is, ultimately, in the mind of the beholder. Energy security is no different in this regard.

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North American Energy Security
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Why North American energy security?
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Canada- US Free Trade Agreement and NAFTA.

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The specific security threats I have in mind are politically motivated:
Terrorist attack against critical energy infrastructure inside North America or abroad;  Possible future military conflicts between nation states (eg US and Iran, China and the US?).
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Oil and Geopolitical Conflict: Early 20th Century
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Oil industry has been at centre of military strategy throughout the 20th century, beginning with two World Wars:  Conversion of British fleet to oil prior to WW l; security of supply concerns lead to Government financial support for opening of Persian (Iranian) oil fields - leads eventually to British Petroleum.  WWI introduces mechanized, mobile warfare (tanks, trucks and planes). WWII Germany invents Blitzkrieg warfare.  Blitzkrieg needs fuel. Germans invade Russia to secure oilfields in the Caucuses. Coal liquefaction invented by Germans (47% of transport fuel supply at peak);  US oil embargo of Japan in 1941. Japanese pre-emptive strike at Pearl Harbour in December, as Japan tries to secure Indonesian oil fields.

North American Oil Dependence and Vulnerability
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In 1945, North America was a net energy exporter and self-sufficient in oil, natural gas and coal.
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The US was the world’s largest oil producer. Pursued a regulated domestic pricing policy. Oil represents 40% of North American (NA) energy supply; N.A. imports 39.8% of oil requirements (9.6mbd); A global oil market exists where global pricing, allocation prevails. produced 14.5 million barrels of oil per day (US: 7.6; Mexico 3.8 and Canada 3.1mbd); consumed 24.1 million barrels per day (US 20.7; Mexico 1.4 and Canada 2.0).

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To-day,
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North America (2004) :
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Geopolitical Importance of Persian Gulf & Saudi Arabia
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Persian Gulf region contains almost 65 percent of known world conventional oil reserves (5 of world’s top oil producers);
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provides 28% of world supply, expected to rise to 43% by 2030; 68% of Japan’s oil requirements come from Persian Gulf and 45% of EU oil imports ; US imports about 2.3 mbd from Gulf countries, about 1.5 mbd from Saudi Arabia which is key to the region and to OPEC

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In 1943, President Roosevelt declared defense of Saudi Arabia “vital” to US national security. Military aid and commitment has grown as US oil imports and Saudi production has grown. Today, Saudi Arabia is key world producer at about 10 mbd;
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23% of world’s conventional reserves; 80 to 85% of the spare capacity in the world; Half of Saudi output comes from one oil field and 66% of Saudi production goes through one plant and two terminals.

Middle East and Energy Security: Post WWII
1951-1953 PM Mossadegh of Iran nationalizes AngloIranian Oil Co, leads to CIA/MI6 plot to oust PM, keep Shah.  1973 Arab-Israeli War, the Arab oil embargo of the US and the first OPEC price spike.  1979 Iranian Revolution, ousts Shah and introduces Islamic republic: leads to the second OPEC price spike.
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FSU occupies Afghanistan (1979).

Middle East and Energy Security: Post WWII
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President Carter declares access to oil a “vital national interest”, to be defended by “any means necessary”.
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Carter establishes rapid deployment military force to secure US and Allied interests - made permanent in 1983 by President Reagan (Central Command – one of five unified commands covering the globe).

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Iran-Iraq war (1980-88): Iraq invasion of Kuwait (1990) and the 1991 Gulf War; US forces in Saudi Arabia leads to 9/11 attacks on US in 2001; The US led invasion of Afghanistan (2002) and Iraq (2003).

Security of Transport
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of world oil trade goes through Straits of :

Hormuz (14 mbd);  Bosphorus ( alternate route: Baku-Tbilisi-Ceyhan buried pipeline)  Malacca (11 mbd);  Bab El-Mandeb
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Suez canal crisis of 1956. Two-thirds of Europe’s oil passed through Suez – Nasser nationalized canal; Israel, France and Britain attack.

North American Energy Dependence and Vulnerability
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What About Natural Gas?  North American conventional natural gas production is close to peaking.
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N.A. consumes 29.2% of world production and has 4.1% of proven reserves. Future supplies to meet growing demand will depend increasingly on imports of Liquefied Natural Gas (LNG). LNG trade well developed in Asia and Europe.

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North American gas prices will be set globally once LNG trade matures. Already NA and European price convergence.

N. American Natural Gas Supply/Demand Outlook

North American Energy Dependence and Vulnerability
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What About Natural Gas?
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Natural gas has same monopoly power and security risk potential:
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The Middle East in total has 40.6% of known reserves; The largest proven reserves of natural gas are in: Russia (26.7%), Qatar (14.4%), and Iran (15.3%).

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Europe already dependent on imports of natural gas:
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Today, OECD Europe imports about 40% of its consumption needs, growing to 66% by 2030. Currently 40% of EU gas imports are from Russia ; Algeria (30%); Norway 25%). By 2030, Russia alone expected to supply 60% of gas imports. Druzhba pipeline (world’s longest).

North American Energy Dependence and Vulnerability
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What about coal?
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In 2004, North America had 279 billion short tons of coal – 96% of which is in the United States. North America has 28% of world’s reserves or 250-300 years supply at current consumption rates. Russia(17%); China (13%) and India (10%). Coal already supplies 50% of US electricity needs and this could be expanded throughout NA. Liquid transport fuel can be made from coal by the Fisher-Tropsch process. Key issue about coal is the high environmental costs, in particular air pollution (NOx, SO2, PM, CO2) and mercury. However:  Clean coal technologies are available at higher capital cost to produce electricity (coal gasification plus combined cycle technology).  Can sequester CO2 in underground storage (enhanced oil and gas recovery or in deep saline aquifers).

Economic Impacts: Fundamentals of Energy Supply
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Fundamentals of energy supply:
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Mega-projects dominate: large economies of scale in production (pipelines, tankers, refineries, electricity generation, transmission and distribution) Very capital intensive facilities (huge financing requirements $100 millions - $billions) Very long lived facilities: 25 to 40 years or longer; Very long regulatory approval process and construction time (eg nuclear, oil sands, etc) (5 to 10 years or longer); All these risks lead to Boom/Bust investment cycle. Energy storage is limited and costly;

Supply & Demand: Price Inelastic in Short Run
D’S’
120.00
S

90.00

Price($/barrel)

70.00
In general: -High impact supply/demand disruption -High financial risk

50.00

S’
0 50

D’
100

15 0 (millions barrels/day) Output

Economic Impact of Price or Availability Shocks
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Eight out of ten post-WWII recessions in the US followed an oil price spike and all economic downturns since 1973 have followed an oil price spike. OPEC energy price shocks of 1973 and 1979 are credited with producing a 7% decline of real GDP in OECD countries in ’74/75 and 7.25% in ’80/82. OECD and IMF estimates:
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Sustained $10/bbl increase in oil prices will reduce real GDP in industrialized countries by 0.5%; and, in developing countries by 0.75%. For example, Ontario economy is very energy intensive: $10/bbl increase reduces real GDP by 0.3 to 0.7%. Quandary for Canadian monetary policy: regional disparity of impact

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For Canada ( a net energy exporter) the short-run macro-economic impacts may be positive. But significant inter-regional reallocations:
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Conclusion: Energy Security Policy Questions
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Where does Canada’s energy policy fit in this picture?
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Is energy security a legitimate concern of Canadian public policy or should it be left to the private market? Should Canada simply react to US national energy policy and their perception of energy security? Should Canadian policy attempt to subsidize domestic energy production (eg nuclear, biomass, etc), promote alternative transportation fuels ( eg coal liquefaction) and/or otherwise limit the import of energy (eg natural gas) from overseas? If so, how much “security” should we buy and what price should we pay? Should Canadians be prepared to assist in protecting (by military force if necessary) international energy transport and supply facilities from any and all aggressors?


				
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posted:5/31/2009
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