The Age of Fallibility

The core of the crisis is the tight supply situation for oil. The reasons are partly secular and partly cyclical. The secular factor is that oil consumption regularly exceeds the discovery of new reserves. In 2004, 30 billion barrels were consumed, but only 8 billion barrels were discovered. Excess capacity has fallen from 12 million barrels per day in 1988 to fewer than 2 million barrels per day currently. An American geophysicist, M. King Hubbert, constructed a theoretical model of oil availability (Hubbert’s Peak), and based on that model he predicted in 1956 that United States oil production would peak between 1965 and 1970; in 1971, he predicted that global oil production would peak between 1995 and 2000. Since he was so close to being right about the United States, his many followers predict that global production has peaked or will peak very soon. The controversy that surrounds these predictions is largely beside the point; the peak can be delayed for a while by using more aggressive and expensive extraction methods. The point is that when a field is half depleted, it becomes increasingly difficult to extract the remaining oil. Most of the giant fields are past the halfway mark, and no new giant field has been found anywhere since 1951, when one was found in Saudi Arabia.²⁹ Depletion figures are notoriously unreliable, but the available evidence indicates that they have been understated. Many publicly traded companies had to restate their reserves downwards, and many of the established producing countries report declining production. The country enjoying the biggest potential reserves, Saudi Arabia, does not provide figures on the depletion of existing fields.

Although the secular trend is clear, most of the near-term fluctuations are due to cyclical factors. Demand has been strong, partly because of the strength of the global economy and partly because of the rise of China, India, and other developing countries which are less energy-efficient than the mature economies. In addition to the tightness in crude supplies, there is a shortage of refining capacity. The fastestgrowing demand is for middle distillates (diesel, jet fuel, and heating oil); but most of the new supplies are heavy crudes, which are difficult to refine into these products. Natural gas supplies are much further away from peaking, but there is a shortage of transportation. These shortages will be overcome in due course. Indeed, the temporary tightness will almost unavoidably be followed by a temporary glut. Right now, the consuming countries believe that they do not have enough inventory. That, together with speculative positions, boosts demand. When supply catches up, these two sources of demand will drop. The tight supply situation has also created an incentive to interfere with supplies for political purposes, as has happened in Nigeria and could happen in Venezuela and Iran. When the bottlenecks are removed, the incentive to interfere with supplies is reduced. All these factors will combine to depress prices. OPEC will arrest the decline by restricting output, thereby creating the excess capacity that is needed to forestall supply interruptions. But the other elements of the global energy crisis—global warming, dependence on politically unstable areas, the resource curse, and eventually Hubbert’s Peak—will remain. The temporary glut may sap the political will to deal with them; indeed, that is what happened after the first energy crisis in the 1970s. It is liable to happen again.

The global energy crisis poses a threat in many ways, though some of the connections are difficult to see. Global warming has little to do with terrorism or with the success of President Hugo Chavez in Venezuela. Yet these disparate developments are connected by the global energy crisis and recognizing the connections helps to put the present moment into a new perspective. For instance, Vice President Dick Cheney used to frighten people by suggesting that terrorists might obtain weapons of mass destruction, and Democrats are still trying to score points by stressing the security of our ports. The real threat is terrorists and others—pirates in Nigeria, Hugo Chavez in Venezuela, and al Qaeda in the Middle East—might disrupt the energy supply chain. This threat was made real on February 24, 2006, when terrorists penetrated the outer gate of the Abqaiq facility in Saudi Arabia—which is capable of processing approximately 10 percent of global energy supply—but were stopped by members of the National Guard. Even though the attack did not have an immediate impact on Saudi oil supplies, it signified an attempt to target the oil infrastructure, a departure from prior tactics.

The various elements in the global energy crisis are easier to tackle when the connections are recognized than they would be on their own. Take one example: deriving a carbon-free fuel from coal. If an efficient technology were developed it could make a major contribution to reducing carbon emissions; it would also reduce the dependence of the United States and China, which have enormous coal reserves, on imported energy; and, of course, it would be an antidote to Hubbert’s Peak. Any one of these considerations may not be sufficient to generate support for carbon extraction from coal, but the three taken together ought to make it a top priority. But carbon extraction also requires energy and current technologies are not fuel-efficient enough; substantial investments in new technologies will be required.

No single measure is sufficient to ease the crisis. Many different actions will have to be taken at the same time, in addition to carbon-free coal, nuclear energy, wind, biomass, and, of course, demand reduction. That is where the price mechanism can be useful: A carbon tax combined with carbon credits would provide the economic incentives to introduce the appropriate adjustments both on the demand side and on the supply side. The Kyoto Protocol set targets for carbon emissions and facilitated the trading of carbon credits. It was a step in the right direction, but it did not go far enough.

The global energy crisis is more complex than any other crisis. It is not a single crisis but a confluence of disparate developments that have reinforced each other and reached crisis point more or less at the same time. They endanger our civilization in various ways. Global warming and nuclear proliferation have already been discussed. But they are only aspects of a more complex situation that threatens to deteriorate into global disintegration. Although the core of the crisis is the tight supply situation for oil, the developments that may bring about disintegration are mainly political.

The global energy crisis may be interpreted as the flip side of globalization. The extent to which it endangers our civilization depends on how we deal with it. Our civilization has survived many crises. Financial markets often go to the brink and then recoil. Only rarely do they go over the brink, as they did in the Asian crisis of 1997. Even then, the authorities intervened when the center of the global financial system came under threat. That is why it is now described as the Asian crisis and did not become a full-fledged crisis of global capitalism. Our political system is less well-equipped to avoid disaster. We have experienced two world wars and we have had some close brushes with a third one. Wars have a tendency to become increasingly devastating. The threat of nuclear war should not be minimized. Our civilization is fuelled by energy; the global energy crisis could destroy it.

The magnitude and multitude of the problems exceed our capacity to deal with them, or even to comprehend them. The present acute phase of the crisis is the outgrowth of misconceptions, particularly those related to 9/11. Although we cannot rid ourselves of misconceptions, we can correct them when we become aware of them. Perhaps the biggest mistake is for the United States to think that it is powerful enough to deal with these problems on its own. The competitive position of one state vis-à-vis the others is not what matters when the viability and sustainability of the world order is at stake. Our definition of national security is too narrow, and the prevailing view that the world order, like a market, will take care of itself if left alone, is plain wrong. Global warming, energy dependency, the resource curse, and the nuclear nonproliferation regime require international cooperation.

Although the global energy crisis demands international cooperation, we must be wary of going to the opposite extreme and disregarding the national interests of sovereign states. No matter what systemic changes are introduced, they need to take these interests into account. Consider China. Until 1993, it was self-sufficient in oil; now it imports almost half its consumption. Its share of the world oil market is only 8 percent, but it accounts for 30 percent of incremental demand. China has a genuine interest in harmonious development. It also has a serious energy-dependence problem as well as serious pollution problems. Therefore, it is a natural partner for developing alternative clean fuels, particularly from coal, which is plentiful in China. But China is not a natural partner in curing the resource curse. On the contrary, in its search for alternative energy sources it has become a customer of rogue states in Africa and Central Asia, a situation that is contrary to China’s interest in harmonious development; but its leadership sees no alternative, particularly after its bid for Unocal was rebuffed. It would behoove the United States government to allow China to acquire stakes in legitimate energy companies, but only if it cooperated in dealing with the resource curse.

Europe ought to lead the way in energy cooperation. It is heavily dependent on natural gas and Russia is its main supplier. The European Union imports 50 percent of its energy needs, and imports are projected to rise to 70 percent by 2020. Russia is by far the biggest supplier of its imported oil (20 percent) and natural gas (40 percent). Many EU countries depend heavily on gas from Russia, which supplies 40 percent of Germany’s total demand, 65–80 percent of Poland’s, Hungary’s, and the Czech Republic’s demand, and almost 100 percent of the gas needs of Austria, Slovakia, and the Baltic states. This makes Europe particularly vulnerable because Russia has begun to use its control over gas supplies as a political weapon. The story is a complicated one and I can give only a brief outline here. When the Soviet system disintegrated, the energy sector was privatized in a chaotic fashion. Devious transactions were perpetrated, like the loan for shares scheme, and enormous fortunes were made. When Vladimir Putin became president, he used the power of the state to regain control of the energy industry. He put the president of Yukos, Mikhail Khodorkovsky, in jail and bankrupted the company. He put his own man, Alexey Miller, in charge of Gazprom and pushed out the previous management that had built a private fiefdom out of Gazprom’s properties. But he did not dissolve the fiefdom but used it to assert control over the production and transportation of gas in the neighboring countries. This led to the formation of a network of shady companies that served the dual purpose of extending Russian influence and creating private wealth. Billions of dollars were siphoned off over the years. The most valuable asset was the gas of Turkmenistan which was resold by a company registered in Hungary at a multiple of the price at which it was bought. While the ownership of Eural Trans Gas was never disclosed, the decisions to give it contracts were made jointly by President Putin and the then-president of Ukraine, Leonid Kuchma. I believe that was one of the reasons why Putin exposed himself so publicly in backing Kuchma’s nominee, Viktor Yanukovich, for president of Ukraine in 2004. After the Orange Revolution, the contract with Turkmenistan passed into the hands of RosUkrEnergo, a company with shady ownership set up by Raiffeisenbank of Austria. At the beginning of 2006, Russia cut off the gas supply to Ukraine. Ukraine, in turn, tapped into the gas that was passing through Ukraine on its way to Europe. This forced Russia to restore supplies to Ukraine; but in the subsequent settlement, Russia gained the upper hand: It promised gas supplies at reduced prices through RosUkrEnergo for six months, but Ukraine committed itself to fixing the transit fees for five years. After six months, Russia will be able to exert political pressure on Ukraine by threatening to raise gas prices. Russia already exercises control over Belarus.

The net result is that Europe is relying for a large portion of its energy supplies on a country that does not hesitate to use its monopoly power in arbitrary ways. Until now, European countries have been competing with each other to obtain supplies from Russia. This has put them at Russia’s mercy. Energy dependence is having a major influence on the attitude and policies of the European Union towards Russia and its neighbors. It will serve the national interests of the member states to develop a European energy policy. Acting together, they can improve the balance of power. In the short run, Russia is in the driver’s seat; An interruption of gas supplies disrupts European economies immediately while an interruption of gas revenues would affect Russia only with a delay. In the long run, the situation is reversed. Russia needs a market for its gas and few alternatives exist as long as Europe sticks together. Europe could use its bargaining power by telling Russia that under present conditions its dependence on Russian gas is excessive. If Russia wants to maintain and increase its market in Europe, it must agree to a change in conditions by signing the European Energy Charter and the Extractive Industries Transparency Initiative. This would break up the Russian gas monopoly, turn the pipelines into highways and allow Europe to increase its gas imports from the former Soviet Union without endangering its energy security. The European Union has its origin in the Coal and Steel Community; it could regain political momentum by developing an effective common energy policy.

Meanwhile, encouraged by the energy shortage and America’s weakness, Russia is assuming an increasingly assertive posture that goes well beyond energy policy. Russia has sold Iran Tor and (through Belarus) S300 anti-aircraft missiles and has refused to rescind the sale in spite of strong U.S. pressure. The missiles will be installed by the fall of 2006 and after that time it will be more difficult for Israel to deliver a preemptive strike against the Iranian nuclear installations. ³⁰ Russia has also granted Hamas a $10 million-a-month subsidy to replace the subsidy withdrawn by the European Union and is reported to be selling arms to Syria.³¹

These decisions mean that Russia is reasserting itself as a major player in the Middle East, playing against Western interests. Underlying all this is a shift in Russia’s national security doctrine which has been publicly announced but has received little attention.³² Evidence is accumulating that Russia may be deliberately promoting an Israeli missile attack on Iran by supplying missile defense to Iran and launching a satellite for Israel that will be used to monitor Iran’s nuclear activities.³³

It is difficult to present a well-considered assessment of the situation because events are unfolding rapidly even as these lines are written (May 2006). All I can do is mention some of the threads that need to be woven together. First, the resource curse: The peculiar dynamic that prevails in countries whose economies depend primarily on revenues from natural resources. Second, the history of Russia since the collapse of the Soviet Union: the chaotic conditions, the wide-spread misery combined with the incredible wealth and success of a few adventurers, the humiliation suffered by Russia as a superpower—greater than the humiliation of Germany after the First World War. Third: the emergence of a new leadership in Russia that has its roots in the KGB but whose world view has been shaped by the far-from-equilibrium conditions which have prevailed since the Soviet Union collapsed. Fourth: the threat posed by the so-called color revolutions in Georgia, Ukraine, and Kyrgyzstan. Fifth: turmoil in the Middle East, the energy shortage, and the precipitous decline of the remaining superpower, the United States.

Trying to weave these threads together, the pattern that seems to be emerging is a shocking one: an adventurous regime in Russia (very different from the stodgy, cautious, and conservative leadership of the Soviet Union) that sees an opportunity to consolidate its power and acquire immense wealth and power based on natural resources. Russia seems to be emerging as a new kind of player on the international scene, a petro-superpower that needs to foment conflict in the Middle East in order to fulfill its aspirations.

I am astounded by this possibility. Although I follow developments in Russia fairly closely, I have been taken unawares. In this respect I am no different from the rest of the world. We are so preoccupied with our internal disagreements that we fail to see gathering external threats. We are still fighting a phantasmagorical war on terror while a real conflagration is looming.

President Bush has reaffirmed his intention to attend the G8 meeting in St. Petersburg in July 2006, in spite of Russia’s refusal to stop missile sales to Iran. He intends to use Russia as an intermediary for getting concessions from Iran just as we are using China as an intermediary with North Korea. But this is a false track. The United States needs to negotiate with Iran directly. Russia has its own agenda. The Putin regime craves the respectability that the G8 meeting in St. Petersburg would confer. The regime will have greater latitude in pursuing an independent line afterward. In retrospect, unless the missile sales to Iran are stopped, Bush’s attendance in St. Petersburg may well come to resemble Neville Chamberlin going to Munich. Russia seems to be counting on the disunity and inertia of the West. Unfortunately, its calculation may prove to be correct. Both the United States and Europe are internally divided and far apart from each other; the European Union is held together by bureaucratic inertia. The business community is also inclined to seek individual deals with Russia rather than to demand certain standards of behavior. There is an urgent need for the West to pull together.

International cooperation ought to extend beyond the immediate emergency. Global warming requires a global solution, but the attitude of the Bush administration stands in the way. On this issue, the American public is ahead of the administration, and it ought to impose its views on the government.

The most pressing task is to agree upon a new non-proliferation treaty. The present treaty is breaking down. Iran is determined to develop its nuclear capabilities and if it is not stopped, nothing can stop a number of other countries from doing the same thing. A missile attack on Iran in the current circumstances would be counter-productive. It would consolidate public support for the current regime and reinforce the determination of the regime to develop nuclear bombs. It would unite the Moslem and much of the developing world against the United States. It would render the position of the occupying forces in Iraq untenable and it would disrupt the world economy without stopping Iran from eventually having nuclear bombs. Both scenarios lead to disaster. The only way out is to agree upon a more equitable non-proliferation regime that would have near universal support. Iran would either agree to join such a regime or it could be forced to do so without incurring the disastrous consequences that a missile attack under the current circumstances would entail.

The global energy crisis, and all it implies, is a major challenge confronting our globalized civilization. It ought to be sufficient to bring about a change of attitude in the United States, provide a focal point for the cohesion of the European Union, and put some content into the concept of a global open society. It will certainly provide a focal point for my future involvement and for the future activities of my foundations. We are already at the cutting edge of fighting the resource curse; we are getting involved in global warming; we intend to take a more active interest in the future of the European Union; and I personally will continue to plead for a fundamental rethinking of America’s role in the world.