An assessment of some of the global energy game-changers
Through a Glass Darkly
St Paul wrote about seeing the future through a glass darkly. That is particularly true of energy markets. You stand a better chance of making money by backing an outsider at a horse race than betting on global energy price trends. A lot of people have lost their shirts trying to predict energy futures so this article needs to be treated with caution. The energy market has proved massively unpredictable over several decades despite attempts by oil tycoons, such as Paul Getty, or energy producers, such as OPEC, to fix the market. So what is coming down the tracks that could make things different?
|A smoggy street in Xian, China|
The two dominant players in Copenhagen, and indeed the world, China and the US, may be different in many ways, they also share many similarities. They are both big countries with a huge demand for energy to move things around and to keep large populations warm. Even more astonishing over the last decade is how middle-class Chinese want to show off their wealth by driving cars causing massive traffic jams and air pollution, just like Americans! The smog in Beijing has caught up with the smog in Los Angeles as cars are replacing bicycles. The resulting growth in energy consumption means that both countries are now competing head-on in global energy markets. The Chinese can now be found in Africa, Latin America, the Gulf and many other parts of the world competing with US and other energy consumers.
What is also similar in both countries is the way in which they support both their energy companies in their international activities and their major supply countries. The US offers military protection to producers in the Gulf and in Africa. China follows a different strategy: it offers to build big infrastructure projects such as railways and ports to win local contracts. But significantly the first Chinese military vessel paid a visit to the Gulf last year. Echoes of the gunboat diplomacy pursued by Europe and the US in the past. China is also developing a deepwater navy supported by a “string of pearls” (major ports) linking China with its international energy markets. A good example of this is the port China acquired in Sri Lanka, thanks to the military help it offered to the Sri Lankan government to finish the Tamil revolt. The Chinese presence in Sri Lanka is viewed with concern by India and the US.
The Chinese strategy is to have a capability to protect international energy shipments, like the US does. For instance, the Chinese are now contributing to the multi-national naval team seeking to suppress piracy off the Horn of Africa that has already seen tankers being held for ransom. They share with Japan
|The smog in Beijing has caught up with the smog in Los Angeles as cars are replacing bicycles|
Another possible flashpoint could come in the contested waters and energy exploration rights involving China, Korea and Japan. China’s growing energy relationship with Iran is also viewed with concern by the US, as it is seeking to impose an economic blockade over the threat of the possible development of Iranian nuclear weapons. If this issue is somehow resolved, and Iran is allowed to develop its massive energy reserves, then there will be even more gas flooding onto global markets then there is now, with a downward effect on prices. Alternatively, if diplomatic efforts fail, there could be military action, which could lead to war in the Strait of Hormuz. If this happens ,energy prices will go through the roof.
Unlike the situation on the gas market, oil production capacity is currently quite constrained, even though there are big projects underway in areas such as offshore Brazil, East Africa and even more in West Africa. Russia seems to be producing at full capacity. OPEC producers believe that in the absence of any major climate change programme and lack of oil from other sources, they can balance global prices in the short term. This is a change as in recent years non-OPEC production put the cartel in a weak position. The OPEC producers in the Gulf are now seen as crucial to future oil supply. They are currently sitting on a (quite limited) oil spare capacity of some 2-3 million barrels per day, largely in Saudi Arabia, Kuwait and the United Arab Emirates. They are planning to invest several billions in expanding this capacity to 7 million barrels within a decade. They argue that their state-owned energy companies should be willing to carry the cost of this spare capacity to help keep the OPEC target of $75 a barrel manageable. Some analysts think this spare capacity could vanish by the end of 2011 and that the new capacity will take many years to come on stream.
The key issue here is that Saudi Arabia needs this income to meet its existing government commitments. It has little room for manoeuvre as it has a fast-growing population with more than half the population being younger than 20, and they have few prospects of jobs. Saudi Arabia is also worried by the growing Shia-Sunni tension in the region. Iran has become the leader of Shia dissatisfaction and has won plaudits in the Arab world for its stand against Israel. Saudi has produced its own Middle East peace plan but, sadly, there seems to be little chance of any resolution to the Israel-Palestinian problem.
The Shia-Sunni proxy battle is being fought out in Iraq as well. Here Iran has strong connections in the south while Saudi Arabia is supporting the Sunnis in the middle of the coutnry. This leaves the Kurds in
|The OPEC producers in the Gulf are now seen as crucial to future oil supply|
Interestingly Gulf producers are looking at new energies to hedge their bets. Abu Dhabi has signed up with the Koreans to build the Arab world’s first civil nuclear plant. Saudi Arabia is also developing a nuclear capacity and has said it will not accept the constraints imposed by the US on the Abu Dhabi deal. Other Arab countries such as Kuwait, Jordan and Egypt are moving towards nuclear as well.
Abu Dhabi has set up an energy investment group, Masdar, that is tracking and reviewing new energy developments. Qatar has established Green Gulf to provide global alternative energy test beds to evaluate new energy technologies. Even though Masdar, part of state-financed Al Mubadala, has a green focus, it is also looking for oil and gas investments in areas such as Central Asia, where it signed contracts in Kazakhstan. In a horse race without clear favourites it can be helpful to back more than one runner.
|'Even Masdar is also looking for oil and gas investments' (picture: Masdar)|
The High North is another energy frontier that has the potential for becoming a game-changer in the same way as Brazil will impact the market once large-scale production begins in that country. The most recent discoveries in the Arctic have been made off Greenland as glaciers melt. Russia claims half the reserves in the Arctic region with a flag planted on the Arctic ocean floor. Other players have other
|Interestingly Gulf producers are looking at new energies to hedge their bets. Abu Dhabi has signed up with the Koreans to build the Arab world’s first civil nuclear plant|
Where does this leave Europe? The EU is trying hard to find a new energy policy while it continues to import large amounts of Russian gas.Your view on what this policy should be depends on where you stand. If you are French, then developing nuclear power using French technology makes sense. If you are British, then you want to see a carbon price mechanism to encourage alternative energy such as wind farms. If you are Spanish, then you want to become an energy gateway for North African energy and possibly green electricity from the massive “Desertec” developments now underway in Morocco with German backing. Germany has had a successful long-term energy relationship with Russia but there are changes taking place. German law has been changed to ensure that strategic assets are protected from international acquisitions by countries such as Russia. Against this confused picture, the EU is pushing the building of the Nabucco pipeline to bring Caspian energy into the picture to diversify supplies. Finding a common policy to meet all the conflicting interests is a tall order.
Coal continues to be the main source of energy for countries such as the US and China. In Europe, it is again Poland that is sitting on Europe’s biggest coal reserves. The challenge is to find a technology that will allow clean burn. Chinese cities suffering severe air pollution are desperate for relief. At the moment such technology is available but expensive. Then there is the question of what to do with
|Finding a common European policy to meet all the conflicting interests is a tall order|
The other big game-changer is economic. Will the world’s markets recover and expand, thus increasing energy demand? Or is there a risk of protectionism and slow-down with reduced demand as countries seek to protect their own economies from imports? The jury is still out on whether the West’s bad debts can be cleared up. Equally the Chinese have just increased interest rates for the first time in three years as they are concerned that a bubble may be developing.
All this leaves us looking through a glass darkly. The only safe prediction about global energy markets is that the current price stability will not last. There are too many factors that could change the demand and supply equation. As the Chinese proverb has it, I fear we are living in interesting times.
Windsor Energy Group
Windsor Energy Group is a not- for- profit organisation that brings together policy-makers and energy companies to review energy policies. It holds an annual meeting at Windsor Castle – hence its name. It is chaired by Lord Howell, a British minister of State whose brief includes energy security. WEG has held international meetings in Gdansk, Tokyo, Almaty and Houston. There is an active series of energy discussions taking place in London and internationally. The author can be reached through email@example.com.