(Provisional transcript as delivered)
Introduction to Dr Liam Fox’s Presentation
Dr John Chipman
Mr Prabhu, thank you very much indeed, especially for demonstrating how a fantastic grip of the facts can nevertheless guide one to a specific set of interesting policies for debate. Thank you very much for combining the detail with the vision.
The next speaker has already been introduced to you by Pierre Lellouche as the future Defence Minister of the UK, so out of politeness I will do nothing to dilute that prediction. While he has been Shadow Minister of Defence, he has actually been very seized by the issue of energy security, so this is not a title that I have just dropped into this lap; it is something about which he has spoken in a number of fora in a number of different continents. To continue that campaign, I invite Liam to take the floor.
Dr Liam Fox, MP
Shadow Secretary of State for Defence, UK
Good afternoon. Last week I was in the US, and I was listening to a speech by one of the candidates there. I will not say which candidate as that would be indiscreet. She was talking about making America energy independent. This is part of a trend: to move away from talking about just energy security and talking about energy independence. Let me begin by making a differentiation between the two. Energy security is about risk management. Energy independence is an impossibility in a complex global economy. When I hear friends and colleagues on Capitol Hill in Washington talking about making America energy independent, I tend to say, ‘Well, let us see if Al Qaeda sink a supertanker in the Malacca Strait and the price of oil goes up and there is an economic disruption to East Asia, see how independent you are.’
This brings me to my first point, which is about politicians and globalisation. Politicians like the upside of globalisation: the chances for increased trade and prosperity, and the potential stabilising effect of economic interdependence. However, they often fail to take into account the downside of globalisation, which is the inevitable importation of strategic risk.
In a complex, sensitive and interdependent global economy, none of us can be insulated from the impact from adverse effects on other economies, particularly the major economies. Yet we are dealing with a complex 21st Century interdependent system with political structures designed for the post Second World War environment, and military structures designed largely for the bipolarity of the Cold War.
Estimates vary about future global energy demand. Some claim that, within 20 years or so, we might see a 50% increase in global demand, with the majority of this coming from developing nations. While this might be an overestimate, what is clear is that, barring recession, demand for energy is set to grow much faster than any increase in supply. Recent reports have suggested that Nigeria, for example, could see the loss of a third of its production, Russia may be unable to maintain let alone increase production, and that the regulatory regime in Alberta has led for now at least to the postponement of upstream investment in one of the world’s most promising areas for oil extraction.
Here in India, the International Energy Agency (IEA) forecasts that energy demand will double between 2005 and 2030 at a rate of some 3.6% per annum. Energy infrastructure investment of around $1.25 trillion would be needed to meet this level of demand. Rapid demand will be driven by both economic and population growth. In energy demand, India currently ranks sixth in the world, but energy usage and penetration are still very low. Even assuming no great population growth, energy demand would still rise dramatically. When the realities of India’s actual population growth are added, it is easy to see the extent of the problem that is being faced.
All net importers of energy face the same basic problems and there is a widespread desire to develop political strategies to deal with the issues of energy security. I believe that any such strategy requires three distinct components. The first is the need for the diversity of the fuels that we use for energy generation in our domestic economies. The second is a rigorous assessment of the geopolitical reality in the regions and countries from which we need to import. The third element is the willingness to invest in the secured transport of vital fuel supplies, whether by sea or via pipelines. All three of these are needed and they need to be underpinned by a sound analysis of our domestic needs within the global supply and demand equation.
I will deal briefly with each of these in turn. Diversity in the fuels we use for domestic energy production is simply about risk management and ensuring that we do not leave ourselves open to overdependence on any one fuel source. This means that we will have to use a mix of oil, gas, nuclear and renewables. India, for example, is rich in coal, with about 8% of the world’s coal reserves, but relatively poor in oil, with only 0.5% of the world’s oil reserves. Each nation will have to determine where its strengths and weaknesses lie and make the appropriate adjustments. For example, India is likely to become a major importer of natural gas over the next few decades, including Liquefied Natural Gas (LNG). The UK now imports both oil and gas, having had the comfort since the 1970s of being on the exporter side of the fence.
With energy security, economic security and national security becoming increasingly synonymous, we need to take an ever closer interest in the security and stability of those countries that we will be importing from. From the economic tensions of the Middle East to the potential instability of West Africa, we find major oil and gas reserves in some of the least predictable parts of the planet. As someone recently said, ‘God must have had a sense of humour.’ Add to this the increasing levels of supplies under the control of national governments and the dangerous territory of energy nationalism where producer states are willing to use hydrocarbons as tools of foreign policy and we have a very worrying picture.
The problem is most acute in the Middle East where regional conflicts continue and tensions over Iran’s nuclear ambitions add further uncertainty about the predictability of future supplies, adding to the adverse sentiment which has an upward effect on prices. The risk of conflict affecting the Strait of Hormuz, whether by accident or design, has been well documented. Even relatively minor events, such as the recent very cold winter in Iran, can have very unexpected consequences, as Turkey discovered when its gas supply was regularly interrupted as domestic demand increased in Iran.
Russia is another potentially problematic supplier. Several months ago, Russia announced its intention to annex a 450,000 square mile portion of ice covered Arctic. Scientists claim that the area on which Russia has audaciously set its sights may contain an estimated 10 billion tonnes of gas and oil deposits. Russia is now rivalling Saudi Arabia as the world’s largest oil producer, and is estimated to have the world’s largest natural gas supplies with 1,680 trillion cubic feet, nearly twice the reserves of the next largest country, Iran.
If military might and nuclear weapons formed the core of Soviet power during the Cold War, Russian elites certainly now view Russia’s energy resources as the basis of Russian power in the modern era. Russia has demonstrated that it has no problem in using its energy resources as a means to promote a broader foreign policy agenda. Ongoing tensions with the Ukraine bear witness to this.
Resource nationalism may play well at home, but at a time of great uncertainty in the global economy, this is no time for brinkmanship by OPEC or Russia or any other major producer. Indeed, it is worrying that, at a time of record commodity prices, instead of investing greater infrastructure, there are producer nations so intent on maximising their profits they run the danger of killing the golden goose.
Unfortunately, the threats do not stop with energy nationalism. Terrorism poses a major threat to world energy supplies, especially in the areas of transport and infrastructures such as refineries. It is no wonder that Osama Bin Laden described the latter as the ‘hinges of the world’s economy.’ Al Qaeda’s 2006 failed attack on an oil facility in Saudi Arabia is a reminder of the threat that terrorism poses to our energy resources.
We then come to the issue of transport. The distribution of global energy supplies means that we are particular vulnerable to the choke points in transport routes around the global from Hormuz to Panama. Other regions will take on an increased importance as we seek new sources of energy imports. The Caspian Basin has been a particular focus of attention, including Tajikistan where India has stationed troops. India is also actively pursing relations with Kazakhstan, Azerbaijan and Iran, although the latter has complications for a nation with a domestic population of 25 million Shia Muslims. Each country will be looking to spread the risk of supply dependence to as wide a range of producers as possible.
What can be done to ensure the security of energy resources, including the refining and transport of such resources? Existing institutions, such as the EU, have a role to play, especially in the case of the EU in countering the threat posed by Russia. An end needs to be brought to the divide and rule which the Kremlin operates through single nation ‘sweetheart’ deals. The European Commission needs to act to remove protectionism and national monopolies creating a genuinely free market in energy. The recent decision by the Energy Observation Network (EON) will be seen as a hopeful sign in that direction. Better interconnections will also reduce the risk of supplies being cut off.
The EU will not be a sufficiently strong vehicle for the UK or the wider West to guarantee energy security. We need to look wider, for example, to NATO. Norway and Turkey, both of which are valuable NATO members, are not members of the EU. No energy security strategy can work without the support and cooperation of these two countries. In the South, Turkey is the gateway to the resource rich caucuses in the Caspian Basin. In the north, Norway is strategically located near the resource rich Arctic Ocean.
Energy security is not a problem that can be dealt with by hoping that one day it will disappear. The complexity of the problem makes it too easy to look the other way and hope that someone else will deal with it; some other organisation will come in. Dealing with energy security issues will involve the protection of maritime supplies and pipelines, and new international arrangements will be required to safeguard supply, as Admiral Blair and others said yesterday.
Our global addiction to hydrocarbons is dangerous. Like all addicts, our habit is increasingly costly and risky. Whether we view the problem from an environmental, economical or security perspective, we need to reduce our dependency. We are harming the global environment with potentially catastrophic consequences. Not the least of these may be a profound impact on the patterns of food production, with all the risks of conflict and mass migration that that might mean. The recent social unrest being faced around the global as a consequence of rising food prices should be a warning shot to all of us.
Competition for scarce resources, combined with high prices, can harm global economic growth and seriously threaten the ability of developing countries to pull their people out of poverty. We in the developed world might have to tighten our belts. Those in the developing world may starve. The combination of dependence on oil and gas, coupled with high prices, means that debt relief and aid budgets can become indirect subsidies to the producer states with money intended to relieve poverty and famine ending in the already swollen coffers of Russia or the Middle Eastern states.
As with any addiction, we also leave ourselves vulnerable to the goodwill or otherwise of our suppliers. This inevitably has consequences for the balance of power. As with any dependency relationship, it also increases the risk of instability and conflict.
At the moment – not tomorrow – we require leadership and action, not equivocation and talk. Time is not a luxury that any of us have.
