E360: Geopolitics of Energy

Winter quarter’s E360 expert panel on the Geopolitics of Energy brought to light many complex issues and general misunderstandings of the role that energy resources play in the global and local politics. Throughout the discussion topics, the panelists more or less agree on the issues in energy and the international political scene. Amongst others, the panelists discussed the differences between oil and gas market, energy security vs. independence, and the false promise of oil reserve for developing countries, three key ideas that are summarized below. 

• Oil and gas are inherently different markets due to infrastructure and timeline of projects
• What we understand as energy independence is actually energy security
• Mismanagement of money is a major concern for developing countries with fossil reserves

 Comparisons between oil & gas markets is misleading.

 The oil and gas markets are fundamentally different, in its infrastructure and geography – which ultimately boils down to the transportation constraints in the gas market.

The high energy density makes long-distance transportation – by pipelines or ships – feasible and the market extremely liquid. This lack of geographic constraint enables oil to be traded in a global market and almost always guarantee the lowest spot prices for consumers. On the other hand, natural gas is much more costly to transport due it’s low energy density (high volume for the same unit of energy) and few existing long-distance pipelines for gas in US. Infrastructure is expensive and takes time, thus making gas less resilient to changes in supply.

As a result, price discrepancy between different regional markets is common, depending on the proximity to the location of shale gas reserves. In the political scheme, natural gas reserves can reduce the US’ energy imports while countries with large oil reserves like Saudi Arabia can guarantee energy security for itself and even moderate oil prices through OPEC. This discrepancy will likely remain because the timeline for infrastructure projects in the gas industry is on the order of decades – whereas political decisions are made in much shorter time scale.

 Energy independence is really energy security

Energy independence is a commonly used term – in political campaigns, especially – that is loosely defined and misunderstood as the state of being self-sufficient in terms of energy resources and impervious to the happenings in the global oil economy.

As mentioned before, oil is global market – thus the oil price in local US market is (essentially) the price in the global market. As a result, the US becomes vulnerable to changes in global oil supply. Countries such as Iran or Saudi Arabia have enough production capacity to significantly increase or reduce production, thus affecting global supply of oil, which ultimately changes price [2].

Therefore, energy independence is unattainable, at least where oil is concerned.

A better framework – or what most people think of as energy independence – is energy security, wherein the production of oil in the US exceeds consumption. That is, if the US were to stop all imports, the economy would be sustainable from the total energy output locally within the country. This reduces vulnerabilities to oil-producing nations who may ‘shut off’ supply in retaliating against US foreign policy, for example.

An article by Tom Gjelten titled “Energy Independence for U.S.? Try Energy Security” published on NPR network is an excellent read on this topic.

Energy reserve can be a ‘curse’ to the developing world.

In the developing world, new oil reserves provide opportunities for economic growth – creating jobs, supporting the local energy market, and adding a source of income from exports. In reality, however, these developing countries are so small that the government has to run both the oil companies and regulator roles simultaneously, presenting a clear conflict of interest.

This can lead to poor management of money, lack of direction with development projects, and political corruption. Nigeria is one such unfortunate example of a missed opportunity, where revenues from oil is funneled to the State governments, only to disappear without any trickle down effects to the local communities. Moreover, since government no longer need tax money from the people, the funding of community development projects, such as schools, hospitals, and even a research institute, were abandoned because tax revenues are replaced the money from oil [3].

Despite the revenue streaming into Nigeria’s economy, there is no hint of sustainable economic or social development. Now, other countries in the sub-Sahara region – Angola, Ghana, amongst others – are projected to grow in oil production and will likely face the same ‘resource curse’. It is clear that oil reserves in developing countries are being abused and misused as political tools for individual gains.

 Event Details

Energy 360 is a quarterly event that aims to educate and stimulate the public’s conversations in an energy topic, by bringing together experts in the field on a discussion panel held at Stanford University. With years of combined experience and research, the panelist for the event includes Mark Thurber, Associate Director of Program on Energy and Sustainable Development (PESD), Dr. Larry Diamond, Senior Fellow at the Hoover Institution and Consulting Professor of Political Science and Sociology, Admiral James Ellis, Jr., President and CEO of Institute of Nuclear Power Operations, and Dr. Richard Sears, Consulting Professor of Energy Resources Engineering at Stanford University. The discussion was moderated by Ognen Stojanovski, Visiting Scholar in Program on Energy and Sustainable Development (PESD).

Questions or comments about the information above? Contact the author, Paricha Duangtaweesub at paricha@stanford.edu or via LinkedIn.

References

[1] https://mitei.mit.edu/system/files/NaturalGas_Chapter7_Markets.pdf

[2] “Energy Independence for U.S.? Try Energy Security” by Tom Gjelten, NPR

http://www.npr.org/2012/10/25/163573768/energy-independence-for-u-s-try-energy-security

[3] “Curse of the Black Gold” by Tom O’Neill, National Geographic

http://ngm.nationalgeographic.com/print/2007/02/nigerian-oil/oneill-text