At the Intersection of Energy and Foreign Policies

Nikolas K. Gvosdev

THE NATIONAL INTEREST

Special Energy Supplement

Winter 2003/04

Most of the discussion in recent years about the relationship between energy and international relations has been focused on the subject of “the Great Game”—the competition to create and control export routes for the hydrocarbon resources of Central Asia and the Caspian Sea—as well as to locate alternative sources in other parts of the world, such as West Africa. Certainly, the question of diversifying the world’s hydrocarbon supply will remain a key issue for debate, especially whether economics or security interests should drive development.

Commenting on this question in the pages of The National Interest last fall, Carla Hills, former U.S. Trade Representative, made the case that economic factors should guide energy policy:

Having a reliable energy source is in our national interest, and so the government should craft an energy policy that maximizes the possibilities of creating that reliability.  Providing a subsidy is a different thing, however.  One of the reasons why some pipelines are not developed is because they’re not needed now. … They don’t provide adequate returns to cover the risk. But if they are needed, the returns will go up, and at a certain point the incentives will become sufficient to cause the line to be built.1

On the other hand, Zeyno Baran, director of the International Energy and Security Program at The Nixon Center, argued earlier this year that the United States has a strategic interest in the successful construction of the “East-West Energy Corridor—the Baku-Tbilisi-Ceyhan (btc) oil pipeline and the Shah Deniz gas pipeline”—even if such projects may not be commercially viable in the short run—because diversification of both energy supplies and export routes “will benefit both the nations of the region and help to ensure the energy security of the Western world.”2

But there are several other important intersections between energy and international affairs beyond “the Great Game” that will rise to the fore as this decade progresses. Energy is increasingly becoming de-linked from pre-existing relationships. Already, oil is freely traded around the globe--oil producers have no interest in who receives their bounty and their supplies will go to the highest bidder. Technological breakthroughs in the area of liquefying natural gas mean that it too can become a more flexibly traded commodity. And the growing integration and interconnectedness of electricity grids means that electric power is becoming a transnational commodity, traded across borders—no longer automatically the preserve of a national monopoly.

There is no need to go into great detail about the importance of a consistent supply of moderately priced energy for ensuring that a modern society functions and prospers. A continental country like the United States depends on a steady and inexpensive stream of fuel to power the trucks and planes that transport goods and people across vast distances.3 A developing economy like India or Malaysia needs a reliable power grid capable of delivering energy to factories and service centers without interruptions or slowdowns in service.

One need look no further than the experience of Georgia over the last decade to see how a prolonged energy crisis can cripple and stunt a society. Once one of the most prosperous of the Soviet republics, Georgia’s industrial output is 10 percent of its 1990 level and agricultural has relapsed largely to subsistence levels. The Canadian International Development Agency highlights some of the effects of Georgia’s energy crisis: heat and electricity are unreliable; power problems exacerbate the deterioration of public services such as health care and sewage treatment and contribute to unemployment. This, in turn, contributes to the country’s ongoing political crisis, since “dissatisfaction with socio-economic conditions leads to dissatisfaction with government.” (It should therefore be no surprise that most Iraqis place a premium on the restoration of the country’s energy infrastructure.  A future regime will be legitimated by its delivery of services--including provision of energy--rather than its ideological commitment to democracy.)

Over time, therefore, a country’s “domestic” energy policy is likely to become inseparable from its “foreign” policy. Or, to put it another way, following Tip O’Neill’s famous aphorism that all politics is local, energy policy will increasingly define a state’s foreign policy position. Take the example of Russia. More than a quarter of Russia’s population lives below the poverty line. One of the ways the cash-strapped Russian government has attempted to subsidize the population is by setting low domestic prices for heating and electricity--Russia’s gas prices are three to four times lower than those paid by consumers in other parts of Europe. The European Union insists that the Russian government end such policies, insisting that the Russian domestic market charge export prices for energy, and has made this demand into a precondition for supporting Russia’s accession to the World Trade Organization. On December 2, President Putin rejected this approach, noting that Russia’s lower energy prices “objectively” reflect Russia’s natural competitive advantages and Russia does not intend to “give them up.” He went on to compare Russia’s possession of energy reserves to “good weather in eu countries with well-developed agriculture”—a natural endowment for which Russia should not be penalized. Under current conditions, it would be political suicide for any politician to suggest massive increases in energy prices for Russian consumers--even if this prevents Russia from joining the wto or creates tensions in its relationship with Europe, Russia’s leading trade partner.4

There are also fears that a country’s energy dependency could constrain its foreign policy choices. Take a country like Bulgaria. A decade of political and economic reforms has led to its growing integration into Euro-Atlantic structures—Bulgaria will formally join nato at the Istanbul summit next year. Yet the process of privatization has created an opportunity for Russian energy companies to bid for and purchase assets in Bulgaria; it is a very real possibility that most of the country’s energy infrastructure will be controlled by Russian firms, some of which are partially owned by the government.  This need not be a problem, as long as the nato-Russia partnership continues to expand and develop, but it potentially creates problems for the Bulgarian government if, as expected, the U.S. obtains basing rights in that country and the United States wishes to use those bases for an operation which Russia opposes. In 2005, we may well have a situation where an American airbase, say at Bezmer, will be connected to a Russian-controlled power grid!

Such concerns are mirrored in other parts of Europe, because 70 percent of Europe’s energy supplies are provided by external suppliers. Moreover, European oil production, especially from the North Sea fields, is dropping. Based on the estimates provided by Mikhail Khodorkovsky, the former ceo of yukos, the Russian oil firm, the West Siberian fields are capable of providing Europe with up to 30 percent of its oil needs (and even supplying the U.S. with ten percent of its imported oil by the end of the decade).5 To essentially double the amount of oil Europe imports from Russia, however, would not be a merely economic decision; it would be one fraught with geopolitical overtones. It would, in essence, require the United States and its allies in Europe to be willing to see Russia as a partner in their economic security. Moreover, it would be a conscious choice to support Russia’s economic reconstruction, since more than 70 percent of the income of Russia’s oil industry is derived from exports--and half of Russia’s federal budget is currently funded by the taxes paid by the energy conglomerates. A stronger Russia, in turn, might seek to play a greater role in the affairs of the Euro-Atlantic community. So, the future of Russia’s relationship with the West is now inextricably connected to energy—and whether the West is prepared to trust that Russia would not abuse the influence that supplying a larger portion of Europe’s energy demands would bring in its wake.

Russia’s increasing geopolitical importance as a source of energy—whether oil, natural gas or electricity—rather than because of its military arsenal also points to another development likely to have geopolitical ramifications: competition for energy. Europe, for example, currently consumes approximately 44 percent of the world’s energy supply—yet it cannot be assured that it will continue to have access to all of the energy that it needs. After all, China has now surpassed Japan as the second largest user of oil, after the United States, and has radically increased its own oil imports.  With domestic production unlikely to increase, China is buying up more oil on the world markets—imports for 2003 are up by 30 percent, and imports as a whole are expected to double, to 4 million barrels a day by 2010.  In thirty years, China will be importing the same amount of oil that the United States currently does—10 million barrels per day.

While China has seen its rate of oil consumption skyrocket over the last decade (by 109 percent), it is not the only hungry consumer.  During the same period, for example, South Korea’s usage increased by 78 percent, and India by 68 percent.  By 2010, India is expected to be the world’s fourth largest consumer of oil, absorbing 3.2 million barrels per day.  What this means is that there will be increased competition not only for existing oil resources but also to discover and lock-in new discoveries.6 India, for example, is actively searching for assets in a number of countries, including Russia, Yemen, Sudan, Vietnam and Iraq.

This in turn has implications for U.S. efforts to use its own oil demand to effect change in other countries. Even if, for example, the United States desires to undercut Saudi Arabia in the future by shifting to Iraq and Russia for additional supplies, the Saudis may find they can recoup potential losses by increasing sales to China (and reportedly interest in learning Chinese has been increasing among Saudis). Efforts to isolate Sudan by the West for egregious behavior have been undercut by the desire of Asian states to exploit that country’s energy resources. In short, the growing global demand for energy may take precedence over pressing for particular changes in an energy producer’s domestic or foreign policies.

Joe Barnes, Amy Jaffe and Edward L. Morse, writing in a related article in this energy supplement, observed that “there is, in short, no easy or perfect fix to our energy dilemmas. Any post-9/11 reassessment of our energy strategy must accept this reality. But it should focus on measures that will allow us to achieve practical progress instead of on risky, expensive alternatives that continue to ignore the demand side of our energy quandary.  All that is lacking is the political will—and leadership—necessary to move beyond what could be called, without exaggeration, a policy of denial.” This is the crucial point. To deny that energy considerations will play a much greater role in shaping a country’s perception of its domestic and foreign policy interests is foolhardy. This does not mean that energy becomes the only consideration, but it does suggest that efforts to compartmentalize energy questions will be more difficult to achieve. There will be an energy dimension to U.S. relations with Europe, Russia, China, India and other major powers. Zbigniew Brzezinski, in his contribution to the Winter 2003/04 issue of The National Interest, makes this absolutely clear:

For at least a generation, the major task facing the United States in the effort to promote global security will be the pacification and then the cooperative organization of a region that contains the world’s greatest concentration of political injustice, social deprivation, demographic congestion, and potential for high-intensity violence. But the region also contains most of the world’s oil and natural gas. In 2002, the area designated as the Global Balkans contained 68 percent of the world’s proven oil reserves and 41 percent of the world’s proven natural gas reserves; it accounted for 32 percent of world oil production and 15 percent of world natural gas production. In 2020, the area is projected to produce roughly 42 million barrels of oil per day—39 percent of the global production total (107.8 million barrels per day). Three key regions—Europe, the United States, and the Far East—collectively are projected to consume 60 percent of that global production (16 percent, 25 percent and 19 percent, respectively).

Here, therein, is the intersection between the two imperatives of keeping the world “safe” and keeping the world “powered”, and it is this intersection which will preoccupy American foreign policymakers in the years to come.

Nikolas K. Gvosdev is executive editor of The National Interest and a senior fellow at The Nixon Center.

1”Surveying the Global Economy”, The National Interest, Fall 2002.

2”From the Caspian to the Mediterranean: The East-West Energy Corridor is Becoming a Reality”, In the National Interest, February 26, 2003.

3 Even a minor reduction in supply can spark higher fuel prices, which has negative economic repercussions. In the short term, a one percent cut in the oil supply can lead to up to a 20 percent increase in price. George L. Perry, “The War on Terrorism, the World Oil Market and the U.S. Economy”, Brookings Analysis Paper #7, October 24, 2001.

4 Certainly, the Russian government acknowledges the need for domestic prices to rise, in part to combat wasteful use of energy. But, as the Economy Minister German Gref declared on December 1, “… we will move in this direction. We cannot move faster, and Russia will make it at the pace that is based on social and economic factors.”

5“Russian Oil’s Future Strategic Global Role”, presentation at the Carnegie Endowment for International Peace, June 17, 2003.

6 Moreover, countries will not only be increasing their consumption but also buying for their strategic petroleum reserves. India, for example, which at present has no strategic reserves is planning to construct storage facilities that will allow it to store 37.5 million barrels of crude oil—an amount sufficient to met demand for fifteen days.