Friday, January 12, 2007

The Rise of “The Axis of Oil”—Big Trouble for the United States
10 January 2007

In Brief: Richard Bell, Communications Director for Post Carbon Institute, reports on the Senate Committee on Energy and Natural Resources' hearing into “The Geopolitics of Oil.”

Richard Bell, Communications Director for Post Carbon Institute, reports on the Senate Committee on Energy and Natural Resources' hearing into “The Geopolitics of Oil.”

Just how bad are the geopolitics of energy, from the perspective of the United States?

This morning the Senate Committee on Energy and Natural Resources launched its New Year with an unusual hearing into “The Geopolitics of Oil.”

The consensus conclusion of the witnesses: the United States is in deep, deep trouble, facing the emergence of an “axis of oil” that threatens to recreate the bi-polar world of the Cold War, complete with Russia as a principal actor.

Normally the Committee deals with less weighty matters, like fuel efficiency standards for cars. But the incoming chairman, Senator Jeff Bingaman, decided to go for the big picture, and the big picture is not pretty. There was an almost palpable sense of graveness and alarm that lent a chill to the room. The vice chair of Goldman Sachs, Robert Hormats, was one of the witnesses, as was the chief economist of the International Energy Agency, Dr. Fatih Birol, so this was hardly a “green” group.

One Senator described the testimony as “frightening.” And the outgoing Republican chair, Senator Domenici (R-NM), said that “what you told us today is absolutely startling with reference to the future.” There appeared to be a genuine sense that some members really were surprised at how bad things look for the U.S. The shock was so great that after declaring himself a “free-market conservative,” Republican Jeff Sessions (R-AL) concluded the session by admitting that if you looked at energy as a national security issue rather than as a market commodity, Congress might be justified in spending more money on energy R&D and tax credits.

The focus of the testimony was on oil in the transportation sector, which will be responsible for most of the predicted increase in demand over the next two decades. Dr. Fatih Birol described this dependence on oil in the auto, truck, and plane sectors as “the Achilles heel” of the energy problem.

Linda Stuntz, who participated in a Council of Foreign Relations report last fall on “National Security Consequences of U.S. Oil Dependency,” stunned the Senators when she said that there was consensus among the report’s authors that talking about “energy independence” for the United States was chasing an impossible dream. Stuntz said that it was not clear whether the U.S. could achieve energy independence even with the most “draconian” government interventions. Dr. Flynt Leverett from the New America Foundation echoed Stuntz’s analysis:

“…there is no economically plausible scenario for a strategically meaningful reduction in the dependence of the United States and its allies on imported hydrocarbons during the next quarter century.”

Having disposed of energy independence, the panel turned to the growing threat to the U.S. as the world’s only superpower. Dr. Leverett laid out a concise history of the rise of “resource nationalism” and “resource mercantilism.” Countries with oil are beginning to use oil for political leverage, like Russia’s cut-off of gas to the Ukraine—resource nationalism.. And national oil companies in oil-importing states are cutting deals with producers outside the commercial market for oil, particularly China and India—resource mercantilism.

Leverett described the emergence of a “new axis of oil,” based on Russian cooperation with the Chinese. Already this Sino-Russian cooperation has led to the minimization of U.S. influence in central Asia. And Russia and China have both been frustrating U.S. policy objectives in Iran, especially the effort to halt Iran’s nuclear weapons program.

Leverett was also very concerned about the strategic competition for influence over Iran in all spheres. He said that the U.S. should enter into negotiations with Iran with the goal of striking a “grand bargain” that would settle a whole slew of issues, arguing that the two countries will never reach agreement negotiating on an issue-by-issue basis. This proposal drew some skeptical comments from several Republican Senators, who questioned the very idea of negotiating with Iran. But as Leverett quickly responded, the U.S. has had successful talks with Iran on important issues like Afghanistan within recent memory.

Robert Hormats supported Leverett’s analysis, saying that the U.S. was fighting “in a post-9/11 environment with a pre-9/11 energy policy.”

The Republicans used the hearing to come to the defense of the beleaguered major oil companies. The most prominent visual aid at the hearings was a large chart showing ownership of oil reserves. State-owned oil companies now control 75% of the world’s oil reserves. Exxon, the largest commercial oil company, is 14th on the list of reserve owners. Senator Domenici (R-NM) suggested that this chart should put an end to all the attacks on U.S. “big oil” companies, and any efforts to tax them further.

But the chart also illustrated another trend that is running strongly against the United States. The percentage of oil reserves in the hands of state-owned companies will only get larger in the future. More and more control will fall into the hands of fewer and fewer producers, increasing the volatility of the entire international oil market.

As to what is to be done, there was consensus among the panel that the U.S. needed to completely alter the place of energy policy on the national agenda. Energy policy has become deeply intertwined with foreign policy, but the existing bureaucracies, both civilian and military, do not yet take account of the critical role of energy. Gen. Charles F. Wald, former Deputy Commander, US European Command, called for the reorganization of the federal bureaucracy to address the needs of a comprehensive national energy strategy, and said that the Defense Department should have a high-ranking energy security director.

All panelists agreed that we need a crash program on many fronts to reduce total consumption of oil while simultaneously vastly expanding the production of biofuels. Senator Dorgan (D-ND) agreed, characterizing U.S. policy thus far as nothing more than “baby steps.”

Several panelists and Senators raised the problem of the rising price of corn as food for humans as a result of the increased production of corn-based ethanol. Everyone hailed the potential of cellulosic ethanol as a way of avoiding the conflict with food for humans.

The panelists agreed that the U.S. should remove the 54 cent a gallon tax on imported ethanol, which would be especially helpful to Brazil’s ethanol industry, which produces ethanol far below the cost of the U.S. industry. Senator Martinez (R-FL) questioned them closely on this point, trying unsuccessfully to get them to say that ending the tariff would be bad for the domestic ethanol industry.

A comeback for nuclear power was also on the list of the panel’s proposed solutions. In this scenario, nuclear power would replace oil if the auto makers produce all-electric vehicles. Then owners could plug them in at night to recharge using electricity generated by new nuclear power plants.

Robert Hormats from Goldman Sachs emphasized the need for more government subsidies and tax breaks for alternatives to oil. He pointed out that the Congress passed a tax credit for oil drilling in 1916 that has never been changed. But the tax credit Congress passed for renewables in 1992 has expired 5 times and been renewed. With such short windows for investment, companies have been unwilling to make long-term investments in renewables. There was much nodding of heads among the Senators on this point.

With all of the fuss about global warming and the designation of polar bears as an endangered species, there was almost no mention of global warming during the entire hearing. Senator Cantwell (D-WA) brought the subject up briefly, suggesting that we should negotiate with the Chinese to supply them with our latest pollution control technologies as part of reducing competition between the U.S. and China. Linda Stuntz threw some very cold water on this suggestion, pointing out that the Chinese were bringing a new coal plant online every 10 days capable of meeting the electricity needs of a city like Dallas. Stuntz said these plants have no pollution control technologies at all, and that at least 20% of these new plants were essentially illegal, having never been approved by the national government at all.

There was a steady drumbeat through the hearing for bold, dramatic action. After closing the hearing, Senator Bingaman was surrounded by reporters. Did he think that Congress was now ready to raise fuel efficiency standards? Bingaman said he did not know, and walked away.