Speech: Energy: A Burning Issue for Foreign Policy
Event: UK Ambassador to the United States Sir David Manning addresses the 2006 Frank E. and Arthur W. Payne Distinguished Lecture
Location: Stanford University
Date: March 13, 2006
Many thanks to Professor Chip Blacker for his introduction.
And let me begin by saying how grateful I am to him, and Stanford University, for the invitation to give one of the Frank and Arthur Payne Lectures. This is one of the best universities in America, and therefore in the world; and it is a great privilege to be given this platform. And let me also say a particular word of thanks to my old friend, Ambassador Dick Morningstar, for all his help with my visit to Stanford.
I should like to be clear, by way of introduction, that my remarks today are personal, and do not necessarily reflect the views of the British government I want the freedom to range over my subject – the impact of energy on foreign policy – that only a personal perspective can give. I shall not claim, in the best traditions of fiction, that all my characters are entirely imaginary: but I shall claim my interpretation of them, and my reading of the plot, is mine and mine alone.
When I was thinking about this lecture some months ago I was struck by a critical, indeed strategic, energy decision that Winston Churchill had to take on the eve of the First World War. It turns out that Daniel Yergin has been thinking along similar lines because, somewhat to my surprise, when I opened this month’s copy of Foreign Affairs, it was to discover that he begins his article “Ensuring Energy Security” with exactly the same Churchillian example that I want to use. Perhaps this is the law of coincidence; perhaps the law of relevance. At any rate, it bears repetition.
In 1911, Winston Churchill faced a difficult decision. Recently appointed First Lord of the Admiralty, Churchill’s task was to ensure that the Royal Navy, symbol of Britain’s imperial power, was ready if there were a war with Germany. The question he faced was whether to convert the Navy from coal, its traditional source of fuel, to oil. The attraction of oil was clear: more efficient use of manpower, less use of cargo space for the fuel, and greater speed. On the other hand, why abandon reliance on safe, secure Welsh coal, in favor of distant and insecure oil supplies from Persia? For Churchill, the balance of risk was clear: he ordered that Britain should base its naval supremacy on oil. Famously, he wrote: “Mastery itself was the prize of the venture.”
Nearly a century later, the challenge of energy is more than ever at the forefront of foreign policy. In the first few months of this year most of the issues at the top of the agenda have included energy. Relations with Iran, Iraq, China, Venezuela and Russia have energy as a central component. So does terrorism; so, by definition, does counter-proliferation. The British government, the European Union, the US Administration, and the multilateral institutions are all faced with a common problem. How can the international community secure reliable, affordable, sustainable and, perhaps above all, safe sources of energy?
The Immediate Backdrop
We have to address this question in a complicated and difficult international environment.
- For many months the West, and indeed the IAEA, has been grappling with the question of how to monitor the ambitions of the world’s fourth largest oil producer to become a nuclear power. Iran’s nuclear development program – long clandestine and denied – is directly counter to the international community’s determination to avoid the proliferation of weapons-grade nuclear fuel.
- The UK’s agenda for the G8 group of countries last year focused on climate change and development in Africa: both raise key questions about energy. This year Russia has said that energy security will be the key theme of its G8 Presidency. Given the Russians’ approach to energy in their dealings with Ukraine, Georgia and their European neighbors, this is welcome and urgent.
- On New Year’s Day, Russia cut its gas supplies to Ukraine. After four days, after warnings from the US Secretary of State, and a period of uncertainty for European countries who depend on Russia for up to 40% of their gas supplies, a deal was brokered. But the lesson was clear: Russia is prepared to use its energy resources for political leverage.
- Two weeks later a series of explosions on the Russia-Georgia border cut off gas supplies to Tbilisi in the middle of one of the coldest winters on record in the Transcaucasus.
- Closer to home, oil prices in the US soared from $24 a barrel in early 2003 to a peak of $70 last September. As a result, President Bush made energy independence a centerpiece of his State of the Union address. Saying that America was “addicted to oil,” he announced a goal for the US to cut imports from the Middle East by 75%, by 2025.
The scarcity of energy supplies and the energy imbalance between nations is a threat to our prosperity and national security. As resources contract, oil-hungry economies will compete for dwindling supplies of hydrocarbons. Competition for fossil fuels will increase. As Sen. Dick Lugar, chairman of the US Senate Foreign Relations Committee recently said “Our critical international security goals, including countering nuclear weapons proliferation, supporting new democracies, and promoting sustainable development are at risk because of over-dependence on fossil fuels.”
So, I want to turn now to the factors that shape our energy security: assess how these are re-defining foreign policy in the 21st Century; and suggest what we might do.
Energy resources have long been a major strategic concern: access to secure sources, control over supply lines: these are issues of national security.
It was in 1947, as the Cold War intensified, that the US Interior Department first called for a new Manhattan project: a $10 billion program that would be capable of producing 2 million barrels a day of synthetic fuels. This was prompted by concern over the US’s potential dependence on oil.
Fifty years ago the Suez crisis arose because the Suez Canal was the route by which Gulf oil reached Europe. The canal cut the journey to the UK to 6,500 miles, almost half that of the journey around the Cape of Good Hope. By 1955 two thirds of Europe’s oil flowed through the canal. Why, argued Nasser, should the oil-producing countries receive 50% of the profits from their oil, if Egypt did not receive 50% of the profits from the canal? The canal was Europe’s jugular. Hence the warning that Prime Minister Eden gave to the Soviet leaders Bulganin and Khrushchev during their visit to London in the April of 1956. He said: “I must be absolutely blunt about the oil” … “We could not live without oil and… we have no intention of being strangled to death.”
The oil crises of the 1970s forced the West to recognize its dependence on cheap oil; and the reality that those who controlled supply were in a position to exert direct political pressure on the rest of the international community. In the words of Henry Kissinger, the oil weapon, wielded in the form of an embargo, “altered irrevocably the world as it had grown up in the postwar period.” Dr Kissinger, by his own admission, had before 1973 known little about oil. That would rapidly change. In the US the shortfall struck at a fundamental belief in the abundance of natural resources. In a matter of months American motorists saw retail gasoline prices climb by 40% and had to sit in gas lines.
That was what prompted President Nixon to launch Project Independence in 1973, three decades after it had first been mooted under the Truman Administration. In the spirit of the Apollo and Manhattan projects he set out a series of measures for the US to meet its “own energy needs without depending on any foreign energy source” by 1980. Seven years later, in response to a second oil crisis, the 1980 Carter Doctrine declared that “any attempt by an outside force to gain control of the Gulf will be regarded as an assault on the vital interests of the United States of America, and … will be repelled by any means necessary, including military force.” There is more than an echo here of what Anthony Eden was saying a quarter of a century earlier.
So warnings about oil addiction and energy dependence have a long pedigree. One might add that so does a reluctance to act on those warnings, whether here in the US or more widely.
And one further historical reminder: In 1990, in the first Gulf War, the West faced the threat of a dictator who was prepared to seize Kuwait. Had he held on to it, Saddam Hussein would have controlled 20% of OPEC production and 20% of world oil reserves. He would have been in a position to intimidate neighboring countries, to be the dominant power in the Gulf.
What have we learned from such episodes? In the short term to allow market forces to allocate supplies, and to depend on the use of excess production capacity and strategic reserves in case of disruption. In the longer term to diversify the types of energy we use and to diversify our sources of supply, as well as to seek efficiency gains that limit the economic damages of price shocks. We have also learned, with varying degrees of success, to develop flexible energy policies based on market mechanisms. The goal has been to allow the market to operate, to reduce the threat of disruption, and to mitigate the effects of a disruption if it does occur.
But this approach is no longer enough. The energy challenge is now more pressing than ever. Despite the warnings down the decades, our societies have become more, not less, vulnerable to the politics of energy. Oil and gas prices are near record highs. The question we now need to frame is not so much what do we do about energy security, but energy insecurity.
The Five Drivers of Energy Insecurity
There are at least five key factors that drive the current energy crisis:
First, rapid population growth in rapidly industrializing countries is fuelling rising energy demand. The International Energy Agency predicts that energy demand will rise by up to 60% by 2030. Global consumption of oil is 50% higher now than it was in 1985: and we have seen a 15% increase since 2000. As one major oil company is fond of reminding us, it took 125 years to consume the first trillion barrels of oil: it will take 35 years to consume the second.
The whole world is hooked on convenient, transportable, versatile, oil. A fifth of the projected global increase will fuel the US, which by 2025 could use as much oil as Canada, Europe, Japan, Australia and New Zealand combined are using today. A 20-mile round trip in an average car to buy a gallon of milk burns a gallon of gasoline at about half the milk’s cost. The extraordinary global oil industry has made US gasoline abundant, cheaper than bottled water, and a half to a fourth cheaper than gasoline in Europe or Japan.
But the scale of future demand will be driven not so much by the US and Western Europe, but by the major emerging economies. China and India have 40% of the world’s population between them – as much as the populations of the next twenty largest countries combined. Billions of people living in developing countries whose economies are twice as oil intensive as ours need to fuel their development. Just one-eighth of the world’s people own cars; many more want one and will soon acquire one.
The World Bank estimates car ownership in China is currently at only seven vehicles per 1,000 people, compared to more than 480 per 1,000 in the United States. By 2030 it is forecast to rise towards Western levels. The pace of economic change is break-neck. China’s economy has averaged 9.5% growth rate over the last twenty years. In 2005, China used 26% of the world’s crude steel, 37% of the cotton and 47% of the cement. By 2005 China had over 350 million mobile phone subscribers, up from just 7 million in 1996, and double the number in the United States.
This revolution needs energy. India’s consumption of oil has doubled since 1992. China’s thirst for oil grew by more than 15% in 2004, has doubled since 1994 and will double again between 2003 and 2010. That is why we have seen China seeking oil partners across the globe, from Sudan to Saudi Arabia. It was no surprise that King Abdullah of Saudi Arabia’s first visit as monarch this January included a stop in China. Asia and the Far East now account for over 50% of Saudi oil exports. It is why we saw the Chinese bid in the summer of 2005 for US-owned Unocal. Competing with these emerging giants for energy strains international relations: global competition for energy sources threatens stability.
Second, the supplies of oil on which we depend are finite. Global oil production is apparently nearing its peak. Although there is intense debate about exactly when this will happen – something Daniel Yergin discusses in the Foreign Affairs article I referred to earlier – current estimates seem to be converging on some point between 2010 and 2020. Oil itself will never run out – as the saying goes, “the stone age did not end because of a lack of stones.” But the unavoidable fact is that the economics of pumping it in future are uncertain. One of the most intriguing things about this debate is that it is happening at all. It is extraordinary that a century into the age of oil, with the global economy dependent on $3 trillion worth of this black liquid each year, we don’t even know how much is left.
The International Energy Agency predicts that, if we do nothing, global oil demand will reach 121 million barrels per day by 2030, up from 85 million barrels today. That will require increasing production by 37 million barrels per day over the next 25 years, of which 25 million barrels per day has yet to be discovered. That is, we’ll have to find four petroleum systems that are each the size of the North Sea.
Is this realistic? Production from existing fields is dropping at about 5% per year. Only one barrel of oil is now being discovered for every four consumed. Globally, the discovery rate of untapped oil peaked in the late 1960s. Over the past decade, oil production has been falling in 33 of the world’s 48 largest oil producing countries, including six of the 11 members of OPEC. How then will we meet the soaring demand that the growing global economy will require?
The third driver of energy insecurity is the growing geographic concentration of energy reserves. Oil and gas supplies are becoming more concentrated and less secure. 80% of oil and gas trade is in three regions: Russia, West Africa and the Gulf. By 2025, 25 million barrels per day (one of three in production) will come from Saudi Arabia, Iran and Iraq. Over 80% of global reserves are in the hands of governments and national oil companies. We are seeing a convergence of geological difficulty with geopolitical uncertainty.
The top eight non-Gulf suppliers are: Angola, Azerbaijan, Colombia, Kazhakstan, Mexico, Nigeria, Russia and Venezuela. The US depends more than ever on the supplies from countries where there are political uncertainties and who may not subscribe to Western values, and with whom relations can be volatile. In some cases the West is paying large sums for oil and gas to countries that are at best equivocal in tackling terrorism, at worst supporting it.
One result of this geographical concentration is that oil and gas flows through a handful of vulnerable transit routes. These choke points may become increasingly vulnerable to attack: the Straits of Hormuz and Bab El-Mandab, the Straits of Malacca and the Bosphorus. Already, nearly 20% of global oil supply flows through one narrow waterway: the Straits of Hormuz.
And when it comes to concentration, the Gulf alone has approximately 65% of declared global reserves. Saudi Arabia, the world’s sole “swing producer” holds one-fourth of global reserves and in spring 2004 controlled 80-85% of spare output capacity. Al Qa’eda calls oil the “umbilical cord and lifeline of the crusader community” and in April 2004 specifically incited attacks on key Gulf installations. Two thirds of Saudi oil goes through one processing plant and two terminals; a half of current Saudi capacity comes from one oilfield.
Fourth, the last eighteen months have shown us that the spare capacity on which we have previously relied is limited. Hurricanes Katrina and Rita removed 1.4 million barrels of production a day from the international markets, more than the total production from Libya or Angola. Today’s high prices are a product of the fact that the oil markets are vulnerable to disruptions by natural disaster or conflict. Individual countries need not be directly affected by a supply shock in order to feel the repercussions. A disruption in one part of the world quickly impacts on world prices and supply. Because oil is traded globally, we are all vulnerable.
Finally, our dependence on hydrocarbons is leading to rising carbon emissions and their potentially devastating impact on the global environment. There is no longer any serious scientific doubt that climate change is occurring. Last year, Prime Minister Tony Blair made climate change one of his two key priorities for the UK Presidency of the G8. Just before the Gleneagles summit, the National Academies of Science of all G8 countries, along with those of India, China and Brazil published a statement which said: “most of the warming in recent decades can be attributed to human activity”…“the scientific understanding of climate change is now sufficiently clear to justify nations taking prompt action … a lack of full scientific uncertainty about some aspects of climate change is not a reason for delaying an immediate response.”
We in the UK, and most of the global scientific community, are convinced that the global economy’s use of hydrocarbons is the primary driver of this abrupt temperature shift and associated sea level rise. Last month US researchers presented evidence that the Greenland ice cap has doubled its melting rate in the last five years. It is now estimated to be losing 220 cubic kilometers of water a year – in comparison the city of Los Angeles uses about one cubic kilometer of water a year. If it melts completely, global sea levels will rise by around seven meters.
There is plenty more that we need to know about climate science. But we can say with certainty that there have not been the current levels of carbon dioxide in the atmosphere for 400,000 years, possibly for 4 million years. That puts the history of our species into perspective. The 10 warmest years on record have been since 1991, the five warmest since 1997, and the single warmest was last year.
Swiss Re, the world’s second largest re-insurer, has forecast that the insurance costs from rising sea levels, more severe droughts and other results of climate change will total $265 billion a year by 2010, four years from now. Climate Change will also lead to a higher risk of conflict over scarce resources, and of natural disasters. And it will hit the poorest hardest, especially those in low lying areas or those affected by the northward spread of diseases such as malaria. A global temperature rise of one degree Celsius will equal a rise of up to four degrees in Africa. Changes of this magnitude will exacerbate global problems such as drought, famine, disease, regional insecurity, and population displacements, and seriously impede poor countries’ efforts to tackle poverty and develop sustainably. Changes of this magnitude will cause huge upheavals and bring with them huge foreign policy crises.
Here then are five factors which are changing the energy landscape: rising demand; dwindling supply; greater concentration of resource in the hands of a few; limited spare capacity; and the environmental impacts of energy use.
A word now on the consequences of energy resource wealth for the “lucky” producer countries, and I put the word lucky in quotation marks; and the impact this has on the wider international community.
First, corruption, that driver of instability. It can take many forms, but the most extreme is the looting of State assets by elites. Many of the most corrupt countries earn the bulk of their export revenues from resources that include oil and gas, diamonds, minerals and timber. In Angola, an IMF audit has been unable to account for hundreds of millions of dollars in oil revenue that went missing under previous governments. Corruption is theft from national exchequers. Dollars spent on fast cars or stashed in foreign bank accounts is money not spent on schools, healthcare, accountable security forces or other essential public services. Nigeria, which has also had to struggle with corruption, has received more than $300 billion in oil revenues in the past 25 years but its per capita income remains below $1 a day.
Energy wealth also helps prop up weak regimes. It insulates them from internal and international pressure. They calculate that the international community is likely to lower its voice and pull its punches because of its energy dependence. The addict needs the pusher. These regimes lack the motivation to make the reforms to their economies that are essential for sustainable economic growth. The sad fact is, too, that many of the countries that are resource rich are the least likely to build the accountable and transparent government structures they need if they are to develop into open and democratic societies.
Dependence on energy exports distorts political and economic institutions, centralizes wealth, and makes leaders resistant to change while at the same time providing them with sufficient resources to stave off necessary reforms. Reliance on resource wealth reduces the imperative to engage with citizens and to promote a healthy civil society. Only 9% of world oil reserves are held by countries considered free by Freedom House.
Energy resources can also be a source of internal instability and conflict. Mineral wealth often fuels internal grievances that cause conflict and civil war. Secrecy about oil payments leads to public resentments. In recent years, armed gangs have roamed the Niger delta, looking for opportunities to extort oil wealth. As the recent kidnappings of oil workers have shown, their demands have become increasingly political.
These factors are well documented. Countries that are highly dependent on revenues from oil and gas, timber and minerals score lower on the UN Human Development Index, have a greater probability of conflict and have larger shares of their population in poverty. The “lucky” countries that are resource rich in fact turn out to suffer from the “natural resource curse.”
There is an Angolan proverb that says “If God loved Angola, He would turn all the diamonds into rocks and all the oil into seawater.”
It’s not just the stunting and distorting impact on political development – the resource curse often brings about economic instability. The rush of foreign earnings drives up the value of the currency. This in turn makes domestically produced goods less competitive at home and abroad. Over time, domestic manufacturing and agriculture decline; then growth suffers.
The income generated by resource exports is often squandered, too, on extravagant military programs, which in turn create internal instability. In the decade from 1984 to 1994 OPEC members’ share of annual military expenditure as a share of total government expenditure was three times as much as developed countries.
The “natural resource curse” can also lead to regional instability. Sometimes this takes the form of simple rivalry for resources of the sort you see in the Caspian basin. Sometimes, energy-rich countries seek to buy regional influence: look at Latin America. And mineral wealth can be used just as easily to put pressure on neighbors and intimidate them – particularly other developing countries that are resource poor – as it can to seduce them and buy their support.
Energy resources then have a very direct bearing on international stability. Badly used, they foster corruption, internal dissent, economic imbalance and bad government, with clear and destructive consequences for the wider international community.
The Foreign Policy Consequences
For consumer countries, there is a tension between our need to secure energy supplies and our other foreign policy goals.
Iran is OPEC’s second largest oil exporter and holds 35% of global gas reserves. Experts predict that interruptions in the flow of Iranian crude to world markets could send prices over $100 a barrel. It does not take a PhD in International Relations to work out that the response of some countries to Iran’s nuclear ambitions has been colored by Iran’s role in the global energy market.
Or take an historical case. In the 1970s, the dominance of Soviet gas supplies to Europe was cause for concern. The first Soviet exports to Poland began in the mid-1940s, but remained small scale. Then, in 1970, a 20-year contract was signed with West Germany, and plans followed for a pipeline across Germany to supply France with Soviet gas. In the context of the Arab embargo, the Soviet Union positioned itself as a more reliable source of energy than the Middle East. The advent of North Sea gas lessened the UK’s dependence on Soviet gas, but today we in Britain have to return to the issues of security and diversity as we again become a net importer of gas. And like the rest of our European partners, we took note of what happened to Ukraine on January 1.
Britain will be affected by developments in Russia whether directly, through a link into Russia’s pipeline network, or indirectly, given the increasingly integrated European market. Russia has the world’s largest natural gas resources, controlled in large part through one state-owned company, Gazprom. In the past, Gazprom has scrupulously maintained security of supply to its Western European customers. It never turned off the taps to its West European clients, even in the depths of the Cold War. But the expansion of Western European demand obviously offers Gazprom increasing revenue and influence.
In the light of the Ukraine episode we are bound to ask ourselves about the reliability of our energy supplies. Where is the balance between supply and demand? How far is this a mutual dependence that transcends political ups and downs? How much of a risk is it sensible to take?
Solutions will involve diversification; a more liberalized EU energy market, closer relations with other Central Asian gas suppliers, strong international commitments as well as more investment in the Russian energy sector. In the meantime, we have to face the fact that the EU will depend for at least a decade on a Russia that demonstrated in early January that it is prepared to turn off the taps.
Energy instability also has an economic impact on consumer countries. We now face the prospect of sustained high oil prices. Some analysts are forecasting spikes to $100 oil this year. Over the last 30 years, oil market disruptions are estimated to have cost the US economy seven trillion dollars. Eight of ten postwar US recessions closely followed an oil-price spike, and according to Alan Greenspan “all economic downturns in the United States since 1973… have been preceded by sharp increases in the price of oil.” For example, the 1973 disruption of one-eighth of US supply doubled unemployment and slashed 1975 GDP by up to 5.5%.
Two Ways to Move Towards Energy Interdependence
The energy challenges that we face are daunting, urgent, but not insurmountable. But we need to look at the problems in the round, and in the medium and long term, rather than focus on the latest crisis. Above all we need to take a strategic view.
I want to conclude with two proposals.
The first concerns technology. Whether you are concerned about the impact of carbon dioxide on the stability of our atmosphere, or about reducing your dependence on foreign oil, it is clear that the solution is technology. How do we transform the technologies on which our societies are based? How do we leverage the scientific breakthroughs, the expertise in research and development, and allow the flows of finance to bring these technologies to market? What market mechanisms can be used to stimulate the investment required? What is the role of government relative to that of the private sector?
It is much easier to list the questions than the answers. Some government intervention is necessary: voluntary activity by business alone will not be enough. We have to put the right incentives in place for the private sector to invest heavily in clean technology. In the UK we are trying to do that through a range of policies, including a form of carbon tax, and a national cap-and-trade scheme for carbon dioxide emissions. As a result our greenhouse gas emissions are over 14% lower today than they were in 1990, during a period when our economy has grown over 35%. We do not need to sacrifice economic prosperity to meet energy and environmental goals.
Last year, at Gleneagles, the G8 launched an Action Plan which looked across the range of international collaboration on technology, and asked what else should be done. As Prime Minster Blair said at the time, we need to launch a new, green industrial revolution in clean, low carbon energy technologies. This G8 Dialogue, as it is now called, is due to have its second annual Ministerial meeting in Mexico this year, and will report back on progress to the G8 in 2008.
But the level of investment required will not come from governments alone. It will have to come from the private sector, acting commercially in a market environment. The International Energy Agency predicts that $16 trillion of investment will be needed to meet the rise in energy demand by 2030. That is $568 billion a year.
This campus is the center of far reaching research on our energy future. For the last 30 years the Energy Modeling Forum has been developing analytical methods and models for energy planning and policy analysis. Stanford’s Global Climate and Energy Project, only three years old, already has 28 research projects under way aimed to develop a portfolio of technology options for a global energy system while reducing greenhouse gas emissions.
But one thing is sure: no one technology will alone provide the solution. Each has a role to play: natural gas, wind and solar, clean coal, hydrogen, cellulosic ethanol. We need a range of technologies that will wean us off hydrocarbons and avoid irreversible damage to the atmosphere. And we don’t need to wait before developing these solutions. A lot can be achieved through application of existing technologies.
Governments for their part must be wary of picking technology winners. They have a terrible record of doing so. But with that caveat, I want to highlight two technologies to which we should pay more attention:
The first is nuclear power. It remains politically controversial. The US administration has stated its intent to see a new nuclear plant built in the US – the first for over 30 years. In the UK we are currently reviewing our energy policy. A key question is whether we need nuclear power to meet our long term energy security and carbon reduction goals. My personal view – and I stress that it is a personal view not a government one – is that nuclear power has to be part of the solution. I accept that there are serious problems to be addressed. Concerns about safety and risk to the public; concerns about what to do with the waste product; concerns about the massive cost of a new phase of reactor building.
More broadly, we need to consider how we can ensure safe, global access to nuclear power, while managing the risks of proliferation. We have grappled with this challenge since the start of the atomic era. Much of the power generation needs of developing countries could be met by nuclear power. It is a zero-carbon source of energy, as opposed to coal to which many emerging economies are turning. We have the technology. There are over 130 nuclear power reactors either under construction, in the planning phase or under consideration around the globe. In my view, we must accept that this is not a technology that is in decline, and shift our focus to finding ways to ensure its safe and secure operation.
We are already collaborating internationally to consider some of these issues. In February 2005 the UK signed up to membership of the Generation IV International Forum, joining the US, France, Japan and six other countries to develop the next generation of nuclear reactors.
Last month, the Bush Administration launched the Global Nuclear Energy Partnership, requesting $250 million of funding to develop new proliferation-resistant technologies with other nations possessing advanced nuclear expertise. The partnership plans to develop Advanced Burner Reactors to improve the recycling potential of used fuel, without the separation of plutonium. They will then develop a fuel services program for developing nations, and help those countries to build small scale proliferation-resistant reactors that can burn down the spent fuel. This will allow countries to access nuclear technology cost effectively, in exchange for their commitment to forgo enrichment and reprocessing activities.
In my view we should take this further. A single international body could be set up to build, operate and supervise a new generation of light water reactors in countries that are Non Proliferation Treaty signatories. They would then be able to access nuclear technology cost effectively; and without risk to the international non-proliferation regime.
The second technology is energy efficiency. This might seem counter-intuitive. But we should think of efficiency as a technology in its own right. It has massive potential to improve our environmental performance and our energy security. Last Autumn, after the severe impact of hurricanes Katrina and Rita on US energy infrastructure, the Administration recognised this, and called for a massive improvement in US energy efficiency. Energy saved is energy that does not need to be produced. Efficiency is an important contributor to energy security.
We still need a much more concerted effort to reduce demand. This is the relatively easy bit. Energy efficiency measures can, in many cases, be implemented at minimal cost. Fifty percent of the UK’s aggressive targets to cut carbon emissions will come, by 2020, from energy efficiency measures. In the US, the Department of Energy reports that if every American homeowner replaced their five most used lightbulbs with more efficient compact fluorescents, the nation would save 800 billion kilowatt hours of electricity, the equivalent of shutting down 21 power plants. Efficiency is also good for business. BP implemented an internal trading program to cut their carbon emissions 10% over 10 years. Through targeting energy efficiencies, they met that goal in two years, and made approximately $635 million in efficiency savings.
Companies such as BP or GE are arguing that they see real business opportunity in developing the next generation of green technologies. They are investing huge sums in research and development so they can lead the technology revolution and dominate innovation. And surely here in the US, the home of innovation, of scientific excellence, you have the skills, the genius, not only to lead the green industrial and green energy revolution, but to profit handsomely from it on a global scale. Rather than see this as a threat, see it as a huge business opportunity.
We need to make the argument so that our publics understand. The US uses 26% of the world’s oil, but has only 4% of the world’s population. The US fuel economy standard for cars has not changed since 1990. We have the technology to do much better. The Energy Information Administration calculates that if currently available auto efficiency technology were implemented it would cut in half the projected US growth in gasoline demand over the next 10 years. And let me raise the issue of tax if only to point out that in the UK the equivalent of a US gallon of gasoline costs $5.88, that is over twice the price here in the US. America’s federal gasoline tax of 18.4 cents a gallon has not been increased since 1993.
That brings me to my second proposal for trying to deal with the energy problem. And that is a transformation in the way we think about and approach these issues. We need a more integrated and strategic approach.
Too often energy sits in its own institutional silo. We will not solve these issues until we see that they are not energy issues alone. They affect our environmental policy, our trade policy, our international development policy. They lie at the heart of our economic policy. And – as I have argued – they have a central impact on our national security and foreign policy.
Energy policy must be integrated better across governments and between governments. In Europe we have made a start. At a meeting in Hampton Court convened by Prime Minister Blair last October, EU leaders agreed a framework for a common European Energy policy. This would diversify sources of power, develop a genuinely open energy market, develop a shared vision of European needs, focus on developing energy efficiency and clean technologies, and develop a coherent approach to EU dialogue with major suppliers. The underlying theme is that we need to work towards a genuinely open and functioning internal market in electricity and gas.
If private sector investment in new technologies is to be leveraged, it will need to be in a well functioning global market. We need better information transparency, both on energy demand and supply. We need to improve the stability of regulatory frameworks. That will help market participants evaluate opportunities from a commercial standpoint, something that is fair to all.
If the Russia-Ukraine episode teaches us anything it is that greater transparency, stability and openness will help us achieve our energy goals, not greater management of markets by governments.
To help achieve this integration, I believe that Europe and the US need a far more coherent transatlantic dialogue about energy. For too long we have dealt with these issues in isolation. We need to recognize that there is no such thing as energy independence. Instead we face the inevitability of energy interdependence.
We share the same challenges, and will need to work together to deliver the solutions. In part this will require us to work with experts in the private sector and the leading academic institutions such as Stanford. But we will also need to consider whether we need stronger international institutions to address our energy concerns.
We already have, in the form of the International Energy Agency, a center of expertise for energy consumers and a mechanism to co-ordinate international stock releases. This operated very effectively in the aftermath of the hurricanes last year. We have a mechanism for dialogue between key producers and consumers through the International Energy Forum. We are working through the Joint Oil Data Initiative to improve the data on the oil markets. We have in the Extractive Industries Transparency Initiative a partnership to promote transparency in producer countries.
But we still tend to consider these questions in isolation. We react to the immediate challenges and crises without seeing the underlying trends, without calculating the sum of the parts. A more integrated transatlantic energy policy is well overdue: one that assesses the strategic challenges and their political consequences.
We have two immediate opportunities in the next six months to build such an approach. The first is the G8 summit, given Russia’s choice of energy as a key topic. Our goal should be a strong public commitment to energy security and stability in the G8 Declaration. And I hope that Russia will, in this context, fulfill its promise to sign up the Energy Charter Treaty, aimed at integrating the energy sectors of the Former Soviet Union and Eastern Europe with wider global markets.
The second opportunity is this year’s EU-US summit, at which I hope energy will be a main topic of discussion. We should use that summit to establish a new EU-US Strategic Energy Forum to consider all aspects of energy: diversification; the development of alternative energy sources; and, above all, security of supply. This Forum, reporting regularly to ministers, should share analyses, share expertise and provide leadership on energy issues. Indeed, a successful EU/US energy forum could invigorate and extend a wider EU/US relationship that is sometimes more preoccupied with trade disputes than with forging transatlantic cooperation on the major strategic issues that confront us. The forum could also provide a focus for OPEC and other major suppliers as they think about their relationships with consumer countries.
I end where I began: energy is central to our foreign policy because it is central to national security. Wherever we look, problems are energy driven. The imperative to collaborate may now be as strong as that which forced us to build collective security structures during the Cold War.
A final thought. This is not a problem that can wait ten years. As these problems become ever more pressing and serious, we need the machinery to understand and react to them, to share knowledge and implement solutions.
If we get these decisions right we open up the prospect of a new technological revolution that will create opportunities and transform our world in ways just as profound as the first industrial revolution. If we get them wrong, we face the prospect of competition and conflict over resources, and destabilizing – perhaps destroying – the environment that we depend on.
As the bumper sticker says: “Good planets are hard to find.”