An Insatiable Thirst for Oil

Ian Bremmer and Crispin Hawes

The world currently uses around 80 million barrels of crude oil a day (with the United States consuming around 20 million barrels per day (bpd), of which half is imported). At present, daily production matches demand.

The Paris-based International Energy Agency (iea) has projected an average annual increase in global energy demand of 1.7 percent a year between 2000 and 2030, an increase over current consumption levels of about 65 percent. While the iea forecasts on the conservative assumption that consuming countries will maintain current energy policies and does not factor in the possibility that new technologies will be developed, there is no question that world demand for energy is rising fast and will likely accelerate in the coming decades.

Crude oil consumption is expected, based on the iea projections, to reach 120 million bpd by 2030. Crucially, projections are that more than 60 percent of the increase in global primary energy use in 2030 will come from developing countries, particularly Asian states. The developing world’s share of global demand will rise from an estimated 30 percent in 2003 to 43 percent in 2030, with a resulting slide in the Organization for Economic Cooperation and Development members’ share from 53 percent to 47 percent. This surge in the developing countries’ use of energy will be driven by their rapid economic and population growth coupled with the process of industrialization and growing urbanization in those states. China is already the second-largest energy consumer in the world, after the United States, and its influence on global energy markets will only increase as economic growth drives demand.

The core of the failure of current U.S. energy policy is that the only real flexibility in the market is held by opec, which not only controls the bulk of global reserves, but most importantly for U.S. policy purposes, most of the world’s spare production capacity. At least for the next four years, virtually all the world’s additional production lies beneath the following states: Saudi Arabia, the United Arab Emirates, Algeria, Kuwait, Libya, Russia, Kazakhstan, Iran, potentially Iraq and possibly Angola.

Yet opec’s spare capacity by the beginning of August stood at under one million barrels per day, all of it effectively in Saudi Arabia. While the United States would like several opec member-states to develop spare capacity for better-diversified sources of energy for the world market, Saudi Arabia wants to maintain the influence that comes with being the only producer that can make a significant difference in total output—and therefore price. The Bush Administration, while pressuring the Saudi government to do more to fight Islamist terrorism, continues to place inordinate faith in the Saudi royals to act in good faith as a “swing producer” of oil. Saudi Arabia has made efforts recently to bring crude prices down from high levels that might encourage greater conservation or investigation into alternative fuel sources, but, unsurprisingly, it is the Saudi interest that is being served here.

It is hard to escape the logic that Saudi and American interests simply are not the same. Saudi Arabia has no incentive to ramp up its production to full capacity.1 Moreover, the United States has been loath to spend its political capital with Riyadh to send a clear signal that spare capacity must be developed and brought on-line.

Mature oil and gas fields are being depleted in many producing countries, including in Saudi Arabia. Without new exploration and development in the major crude oil production areas there is no hope of staying ahead of the demand curve.

All this potential new capacity from opec countries and in West Africa will not cover the expected expansion in Asian demand over the coming ten years. To make up the difference, the United States must look toward Russia and the underexploited and underexplored fields of the Caspian and Siberia.

The so-called new “Great Game” in the Caspian region—the competition between the United States and Russia for influence and resources in Central Asia that began with the end of the Cold War—is over. It ended in a draw. Russia was not able to monopolize the region’s energy transportation links; the construction of the Baku-Ceyhan pipeline, in particular, ensures that not all Caspian oil will cross Russian territory on its way west. At the same time, Russia’s gas monopoly, Gazprom, still controls the transport of Central Asia’s gas, which, as in Soviet times, will pass through Russian-controlled routes.

Moscow can’t prevent limited American political and economic influence in the Central Asian area of the former Soviet space. But given the traditional economic and political dependence of the local Central Asian governments on Moscow, Russia will remain a central player in the region for the foreseeable future. Neither Moscow nor Washington gains much from further geopolitical gamesmanship.

If there is nothing to be gained by rivalry, there is plenty to be gained through partnership. For the energy-dependent industrialized West, bringing more of the Caspian region’s considerable reserves to market is vitally important. Given America’s current range of security commitments around the world, it is more important than ever that Washington develop a strategy to increase and diversify its energy supply.

Russia’s global market power is seriously limited by the lack of sufficient export capacity in the Transneft pipeline system. The total export capacity of the system is about 3.85 million bpd, but 350,000 of those barrels are used for exports of Kazakh crude, and another 300,000 bpd of capacity sits idle because of an 18-month-old Russian embargo on pipeline exports through the Latvian port of Ventspils.

A million bpd are exported by rail—a relatively expensive way to export oil—because there is no available pipeline capacity. But the situation is actually worse than that—most of Russia’s 1.6 million bpd of refined product exports are, in fact, value damaging. If there were enough pipeline export capacity for crude oil, most of these 1.6 million barrels would be exported as crude rather than product. So, assuming that the Ventspils embargo eventually ends, the Transneft system is roughly 2.5 million bpd short of current needs.

As part of an integrated global energy policy, the next presidential administration should push for an ambitious pipeline development policy with Russia, in the same way that previous administrations actively lobbied for the development of the Baku-Ceyhan pipeline in the 1990s. At the moment, there is no real movement on such a strategy.

Russia too has much to gain from a cooperative relationship with the West in the exploration, exploitation and transport of Caspian-area energy reserves. The technology and investment the West can provide are crucial for the realization of Russia’s plans to maximize profits from exceptionally high oil prices as the non-energy sectors of the Russian economy struggle to become more competitive. In addition, the Kremlin has so far accepted the temporary presence of American soldiers in Central Asia, because these troops provide Russia a nearly cost-free buffer against any Central Asian unrest that might threaten Russia’s southern flank. A mutually lucrative energy development partnership with Russia in the politically volatile Caspian region could lead to broader and deeper cooperation in the development of oil reserves in Siberia and the Russian Far East and the construction of a vitally important new pipeline from Siberia to the Pacific.

The states of the Caspian region badly need the political and security stability that will attract continuing investment in the development of its energy resources. The zero-sum notion that there is a certain amount of oil for the regional powers to fight over is dangerously shortsighted, particularly at a time when the world’s hunger for energy is growing so quickly, and ever more pipelines and export routes are needed to get supplies to market. There is more than sufficient market share for Russia, Azerbaijan and Kazakhstan to guarantee each of them substantial national revenue. What is needed is a dynamic, well-coordinated partnership that profits from local comparative advantages and economies of scale to get untapped energy resources to the markets that need them.

The United States, the European Union, China, Russia and the other littoral states of the Caspian should view the Caspian area as a single integrated energy marketplace. Together they should begin a comprehensive “Eurasian energy dialogue” that will bring together the major outside investors—especially the United States and the European Union—with the region’s key actors, including Russia, Azerbaijan and Kazakhstan.

Joint projects that combine the skills, resources and assets of Western, Asian and Russian firms can bring online energy deposits that would otherwise remain in the ground. Tension and rivalry between China and Japan over access to Russian oil and gas can be eased by a more transparent and cooperative approach to the development of Caspian energy resources and the inclusion of China at the highest levels of the energy dialogue.

Washington must resist the temptation to bring its Persian Gulf strategy, in which the United States jealously guards its regional hegemony in order to deter and contain any potential rival, to the Caspian. While the dangerous potential competitor in the Persian Gulf, Iran, has no interest in any partnership with the United States beyond the most pragmatic situational cooperation, the Caspian’s regional heavyweight is Russia, a nation with which the United States and Europe reasonably expect to enjoy close relations, and a nation that the United States cannot and should not attempt to isolate.

This piece has been excerpted from the Fall 2003 issue of The National Interest.

 Updated 9/28/04