Energy Efficiency can be the best ally in geopolitics for net importers and consumers. And there are good reasons to believe that prices below “shock” high levels of mid-2008 are here to stay for a while. The reason: the energy efficiency trend will “win” the race against the gap between over-demand from addicted oil consumers and underproduction from oil exporters due to oil peak coming and despite the multiple political marketing announcements of recent new discoveries in Gulf of Mexico, Brazil off the coast pre-salt and elsewhere.
And this “optimist” efficiency trend is true not only in the OECD countries, but also in the emerging markets. The US is no longer a driver of growth in the global demand for oil. Oil demand growth in the Middle East is now 35-40 percent below the rates of 2003-2008. China, a major oil importer, is investing huge in “green” strategies and developing a go global strategy to secure direct access to commodities, including oil and gas, in the long term. As a conclusion: instead of rates of 1.5-1.8 percent per year, as in the previous decade, oil demand growth is more likely to fall in the range of 1.0-1.3 per cent. This means 500,000 barrels of crude a day less.
That’s a contrarian view regarding the present mainstream opinion in the media from most oil analysts that expect a new dramatic rising in oil barrel prices, similar to the overshooting we witnessed from beginning 2007 until July 2008, as soon as recovery in the world economy will resume. A new oil shock is in the short-medium-term agenda and an oil crunch is been forecasted for 2015.
“This is probably a mistaken view. One extraordinary lesson of the last 60 years is that after every spike in oil prices, demand growth flattens considerably”, wrote Edward L. Morse, a former Deputy Assistant Secretary of State for International Energy Policy from 1979 to 1981. During the Carter and Reagan American administrations, Morse held various positions in the Department of State. He represented the United States at the International Energy Agency. Morse argues his efficient hypothesis in a recent article at Foreign Affairs magazine, titled ‘Low and Behold, Making the Most of Cheap Oil’ (September/October 2009, volume 88, number 5).
Dr. Morse also adds a deep analysis about the geopolitical strategy of Saudi Arabia, the OPEC leader interested in a growing influence in the G20, and the difficult situation of gas politics from Russia, a major power in a strategic down trend that “has been slow to recognize that the effectiveness of its energy weapon has declined.” Dr. Morse emphasizes the importance of a strategic dialogue with Saudi Arabia and the importance of a truly united Europe to influence Russia.
OIL & GAS GEOPOLITICS
. “It’s highly unlikely for the BRICs to converge in [energy] policy.”
. “It is very hard to see how OPEC’s coherence could be maintained by expansion to Russia and Brazil.”
. “Even in the case of Angola there are already signs that OPEC membership is straining the country’s ability to attract foreign capital, which is in its long-term interest.”
. “There is likely to be a race on in the period 2012-2015 or so between demand and supply and no one has a crystal ball good enough to see whether there will be another price spike before new supplies are harnessed from these regions.”
Edward Lewis Morse, a New Yorker, 67, is an American energy economist, with a PhD from Princeton University. He is currently the Global Head of Research at Louis Capital Markets, a global independent broker-dealer, located also in New York. From 1969 to 1975, he taught at the Woodrow Wilson School at Princeton University. From 2006 to 2008, he was Managing Director and Head of Commodities Research at Lehman Brothers, where he argued the oil price rises of 2007 and 2008 were an unsustainable bubble, fueled, in part, by behavioral herding. After the sink of LB last year in the Great Panic weeks of September and October, he moved to Louis Capital.
Dr. Morse is Chairman of the New York Energy Forum and serves on a number of academic advisory boards, including those of the energy programs at Columbia University and Johns Hopkins School of Advanced International Studies. He is a member of the Council on Foreign Relations and of the Oxford Energy Policy Club, as well as a member of the editorial committee of The Geopolitics of Energy and of the journal Oil.
Interview by Jorge Nascimento Rodrigues
QUESTION: Some analysts refer to a risk of an oil crunch next decade, others to peak oil coming overshooting future high prices, but your main argument is that the main trend is the continuation of energy efficiency from world larger importers and consumers. But, in the article in Foreign Affairs the argument regarding China and other emergent powers’ efficiency is not supported with convincing and detailed data like in the case of OCDE (where that trend is convincingly supported with historical data)…
ANSWER: I disagree that there is no evidence of a change in emerging markets. Over the past few years most of the governments in Asia have eliminated energy subsidies, if no completely, then certainly substantially. This is as true of China as it is of Malaysia, India, and half dozen additional countries. The elimination of energy subsidies to the steel, cement and aluminum industries in China is already having a significant impact of energy demand. Similarly, the Russian government has moved significantly toward the elimination of natural gas price subsidies, which is bound to have a huge impact on supply as well, by freeing up new volumes of gas for global markets.
QUESTION: Can the BRICs converge in a common energy front that use the oil and gas as geopolitical weapons in the near future, for instance in the next G20 meetings? Or they have different agendas, times and constraints?
ANSWER: It’s highly unlikely for the BRICs to converge in policy; one of them, Russia, is the world’s largest hydrocarbon producing country; two others – India and China — are structurally energy short. And Brazil is self sufficient but emerging as a high tech-based exporter. They have very different attitudes toward the scope of the public and private sector when it comes to energy.
QUESTION: OPEC gained or lost political capacity during this financial and economic crisis? Will OPEC profit from the G20 geopolitical emergence?
ANSWER: It’s hard to speak of OPEC in the context of the G-20. Certainly Saudi Arabia, as a major OPEC member and also a major holder of foreign exchange, has clear benefits from membership in the G-20, which other, poorer OPEC countries do not have. The G-20 is expected to join the push toward energy transparency and the elimination of energy subsidies and these goals are very difficult for most of the members of OPEC.
QUESTION: Do you think countries like Brazil and Russia that are out of the OPEC will converge for the cartel? Has Saudi Arabia capacity or interest to bring them in? Angola was one of the outsiders that OPEC brought in. The example will be replicated?
ANSWER: It is very hard to see how OPEC’s coherence could be maintained by expansion to Russia and Brazil. Aside from political differences with Russia, most OPEC members fear that Russia’s participation in OPEC, given the country’s military and industrial strengths, could overwhelm them. Even in the case of Angola there are already signs that OPEC membership is straining the country’s ability to attract foreign capital, which is in its long-term interest. Angola’s production capacity is expected to reach 2.2 million barrels per day by the end of this year and it has an OPEC quota of 1.65 million b/d. That’s a substantial strain and could well violate the covenants and intention of the recent IMF re-financing package that the country just accepted.
QUESTION: Do you think Angola can opt out from OPEC? Or for regional geopolitical ambitions it’s strategically important for Luanda to stay at the cartel and leverage politically the membership?
ANSWER: It is not clear to me that there are any advantages for Luanda to leverage by being in OPEC. Certainly, it opens Angola to more diplomatic opportunities, but as a producer with more than 2 m b/d of production and as Africa’s largest and fastest growing producer it can, much as Norway did in Europe, organize informal and formal meetings centered in Luanda that like this upcoming OPEC meeting scheduled for December can bring the world oil industry’s leadership to the country and assure that Angola’s oil and political leadership will be hosted visibly abroad.
QUESTION: There’s some media hype and political marketing around recent Brazil pre-salt, Mexico new deep water discoveries, Canada oil sands, etc. From all that breaking news, what’s really feasible? And what’s the time frame?
ANSWER: BP in announcing a new discovery in the US Gulf of Mexico this past month also announced its view that there are 200 billion barrels of recoverable resources in the Arctic – another Saudi Arabia. The issue for the deep waters – in the Atlantic Basin, Gulf of Mexico, Caspian, Eastern Mediterranean, Arctic Ocean, and the waters off Australia and Indonesia – is one of timing. There was a great spurt of drilling mounting in these waters in 2003 to 2008. The momentum in these waters is still great. But there is likely to be a race on in the period 2012-2015 or so between demand and supply and no one has a crystal ball good enough to see whether there will be another price spike before new supplies are harnessed from these regions.
QUESTION: You read the article of Saudi prince al-Faisal in Foreign Policy calling for realism from America. As you mention also, is it impossible for Washington to have an independent energy strategy?
ANSWER: My own article in Foreign Affairs tracks closely with Prince Turki’s article in Foreign Policy magazine. The problem at the moment is that there is no one in Washington, not even at the Department of Energy, in a senior position who wants to seize a leadership position in international energy. This is a loss for the US and from my perspective a loss for the world.
QUESTION: Is Europe definitely a political prisoner of the gas trap from the Russian great power politics and from some Maghreb rogue states?
ANSWER: If Europe is a political prisoner of anything it is of its own internal disagreements. A united Europe could greatly influence Moscow. A Europe with political leaders like Berlusconi who try to achieve special gains vis-à-vis Moscow is the great danger to Europe’s finding a way to assure its energy security.