The price of oil has dropped more than 60 percent since the summer of 2014. This is not necessarily a bad thing for global economic growth; however, the associated risks are increasing. Upstream investment has dropped for two consecutive years, which may cause a surprise price hike when demand returns. This is occurring among high-cost producers in non-OPEC countries in particular.
The International Energy Agency (IEA) warns in its World Energy Outlook for 2015 of the resulting risk that importing countries will increasingly rely on the Middle Eastern OPEC producers, who are becoming ever less socially stable due to declining revenues.
At present, the current oil market seems well-supplied, with additional production and exports from Iran, but Saudi Arabia considers Iran’s revival to be a threat to its own regional hegemony. The geopolitics of the Middle East, to say nothing of the situation in Syria or ISIS, is increasing the uncertainty of the oil market in the longer term. As Winston Churchill said, “safety and certainty in oil lie in variety, and variety alone.” Not only a diversification away from Middle East suppliers, but also diversification of fuels for power generation from oil to coal, gas, nuclear, renewables as well as energy efficiency, are becoming ever more important.
As a cleaner form of energy with more diversified suppliers, natural gas is becoming more attractive thanks to the recent shale revolution. The U.S. is benefiting greatly from this revolution, which brings triple wins.
First, cheap gas stimulates the economy and creates jobs. It improves American industrial competitiveness through cheaper electricity and chemical input costs.
Second, by replacing coal by gas in power generation, the U.S. has reduced CO2 emissions, which enabled its strong leadership and success at COP21 in Paris last year.
Third, it reduces imports of oil and gas. In fact, the U.S. has started exporting gas, and the age of U.S. “Energy Independence” is at hand. The U.S. will no longer need oil from the Middle East in 2030. This geopolitical advantage, as General David Petraeus called it, “the decades of the United States,” enables the U.S. to take tougher diplomatic positions towards the Middle East and Russia.
Though it may be a matter of “decades,” the U.S. is in fact likely to be the sole winner in the new energy game, while the rest of the world faces a very uncertain and stormy energy future. And yet, American domestic politics in this presidential election year is swinging towards “isolationism and protectionism”: a danger enunciated by former Secretary of State James Baker in a speech at his Global Leadership Awards Gala at Columbia University last month.
A growing Asia will need new sources and likely turn to Russia in order to reduce an excessive dependency on the Middle East. However, the unfortunate developments in Ukraine and resulting sanctions have driven Russia towards China, resulting in a windfall deal for a gas pipeline between the two countries.
Geopolitically speaking, it is in nobody’s interest to make Russia a junior partner to China. Russia can also play an important role in the stability of the Middle East. The G7 should overcome its antagonism and open hostility towards Russia and welcome its return to the G8. The US and Russia together can play a mediatory role between a skeptical Saudi Arabia and a confident Iran to help resolve antagonism in the Middle East.
Europe can provide an excellent historical lesson on how to overcome isolationism and fight antagonism among countries. The origins of the EU lie in the European Coal and Steel Community (ECSC), through which Germany and France sought to overcome their differences after World War II.
The EU is creating the “Energy Union,” a collective energy security and sustainability framework, using cross-border pipelines and electrical power grids. The use of renewables is being expanded through enlarged power markets. The Desertec project may further connect Europe with the Middle East and North African (MENA) countries. The Spanish Energy Minister proudly called it “Energy for Peace.”
Can Asia learn from this? Yes, in fact, ASEAN countries have actual plans for better connectivity through grid lines and pipelines. In East Asia, where countries have found it difficult to overcome historical antagonism, it is more difficult to build confidence. However, a private-sector alliance could point the way forward. Softbank of Japan, State Grid of China, KEPCO of Korea, and ROSSETI of Russia, have agreed on a project to research the building of an energy grid connecting the four nations. This may be a new step towards “Energy for Peace in East Asia.”
The IEA has functioned as a global oil security forum since 1974. Limiting membership in the IEA to members of the OECD is increasingly obsolete because more than half of global oil demand comes from developing countries and their share is growing. It is China and India who would suffer most if the Strait of Hormuz were to be blocked.
As the Executive Director of the IEA, I tried my best to convince China and India to join the agency. With the help of the former Secretary of State Henry Kissinger, the founding father of the IEA, we came very close, but didn’t succeed. Some European members were reluctant because it could alter the IEA’s governance. China may instead think of building an Asian IEA in the Shanghai Cooperation Organization.
Maintaining the relevance of the IEA is of urgent importance for the current members, as well as for China and India. China and India have become associate members and the G7 can pave the way for the next step; their full entry into the agency. The two nations are already members of the G20 and playing a major role for financial stability. In the climate change mitigation negotiations, China and India are parties to the Paris accord. Why would they not be willing to play a similar role in global energy governance to reduce the level of uncertainty?
Faced with a stormy energy future, the coming G7 summit in Ise-Shima will provide G7 leaders and the whole world with a good opportunity to overcome international antagonism and isolationism through innovative ideas for cooperation.
Nobuo TANAKA is former Executive Director of the IEA, and is currently President of the Sasakawa Peace Foundation.