The New Energy Realists
By Senator Richard G. Lugar
As submitted to the National Interest
Summer 2006

In August 2005, President Bush asked me to undertake a diplomatic mission to Algeria and Morocco, to facilitate the release of the longest-held prisoners of war in the world: 404 Moroccan soldiers, some of whom had been held since the 1970s by the Polisario Front operating out of Algeria. While in the region, I took the opportunity to visit Libya, to help move forward the process of normalizing relations between the United States and Libya, and met with senior officials, including Muammar Qaddafi.

But this trip also brought me face-to-face with the new reality of global economic life. The hotel I stayed at in Tripoli, the Corinthia, was filled with representatives from China, India, and Western oil companies who were in Libya to stake out drilling or refining options in this newly opened oil frontier, which has proven reserves of 39 billion barrels—more than Mexico or Nigeria. The world had come to the Corinthia Hotel to compete for the energy opportunities that Libya’s expected return to the international mainstream has made so promising.

I had observed the same thing in Algeria, which also has significant reserves of oil and natural gas. Wherever there are proven energy supplies and a government willing to bargain, one can find similar conclaves of oil and gas prospectors.

In particular, the Chinese and Indians, with one third of the world’s people between them, know that their economic future is tied to finding sufficient energy resources to sustain their rapid economic growth. China now trails only the United States in global energy consumption; India is farther behind, but its population and energy demand are growing rapidly. Chinese and Indian firms are negotiating with anyone willing to sell them an energy lifeline—including regimes, such as Sudan, Burma, and Iran, with poor human rights records or records of supporting terrorism.

With less than 5 percent of the world's population, the United States consumes 25 percent of the world’s supply of oil. But demand for oil is increasing far more rapidly than we expected even a few years ago. By 2030, the world will be consuming 50 percent more energy than it does today.

For Americans, the gasoline price spikes following Hurricanes Katrina and Rita brought home the tenuousness of short-term energy supplies. But most people still do not fully appreciate our economic vulnerability to sustained high prices--or another energy shock—and the consequences of the heated competition that is already occurring throughout the world to secure energy supplies. If oil prices average $60 a barrel through 2006, then the United States would spend about $320 billion on oil imports this year.
Worse, from a security point of view, most of the world’s oil is concentrated in places that are either hostile to American interests or vulnerable to political upheaval and terrorism. The dangers this poses are not speculative; they are facts of life today. We must respond accordingly.

For the last several decades, the debate over U.S. energy security has pitted pro-oil “realists” against “idealistic” advocates of alternative energy.

Pro-oil commentators argue that our current dependence on oil (and on oil imports) is a choice of the free marketplace—we use oil because it is cheap and abundant. Moreover, they contend, alternatives would be more expensive and could only make up a tiny share of the energy consumed. They have implied that those who bemoan oil dependency do not understand that every energy alternative comes with its own problems and limitations. For example, Lee Raymond, the former CEO of ExxonMobil, said in 2005: “There are many alternative forms of energy that people talk about that may be interesting. But they are not consequential on the scale that will be needed, and they may never have a significant impact on the energy balance.”

The proponents of alternative energy, for their part, have sometimes fallen into the trap of suggesting that our energy problems are easily solved. This is not the case. Relieving our dependence on oil in any meaningful way is going to take great investments of time, money, and political will. There is no silver bullet.

It is now clear that the true “realists” are those who understand that without major changes in the way we get our energy, life in America will be far more difficult in the coming decades. No one who cares about U.S. foreign policy, national security, and long-term economic growth can afford to ignore what is happening in Iran, Russia, Venezuela, or even in the lobby of the Corinthia Hotel. And in the decades to come, oil supplies will be stretched to the limit by economic growth in both the industrialized West and in large rapidly growing economies. As former Secretary of Energy James Schlesinger noted in these pages in the Winter 2005/06 issue, “the day of reckoning draws nigh”—the point at which rising demand can no longer be accommodated.

This is why the new energy realists believe that a laissez faire energy policy based solely on market evolution is a naïve posture—especially when most of the world’s oil and natural gas is not controlled by market forces. Geology and politics have created petro-superpowers that nearly monopolize the world’s oil supply. Robin West of PFC Energy estimates that foreign governments, through their national oil companies, control more than three-quarters of the world’s oil reserves. These governments set prices through their investment and production decisions, and they have wide latitude to shut off the taps for political reasons.

As we approach the point where the world's oil-hungry economies are competing for insufficient supplies of energy, oil will become an even stronger magnet for conflict and military action than it already is. And as more cash flows into the coffers of the petro-states, we can expect increased opportunities for corruption and less pressure to engage in political and economic reform.

At the same time, American leverage around the world—already declining due to our energy dependence—will further decrease. Energy is the albatross of U.S. national security. Already we are witnessing how oil and natural gas have become the currencies by which energy-rich countries leverage their interests against import-dependent nations such as ours. Iran has repeatedly threatened to cut off oil exports if economic sanctions are imposed against it for its nuclear activities. Similarly Hugo Chavez in Venezuela has threatened an oil export embargo against the United States. The consequences of such actions could be severe. Hillard Huntington, an expert on economic modeling from Stanford University, recently told the Senate Foreign Relations Committee that if an external shock were to lead to an abrupt doubling of world crude oil prices, some analysts estimate the level of real U.S. GDP could decline by 5 percent.

We are seeing Iran and Venezuela cultivate energy relationships with nations that are in a position to block economic sanctions or provide other political assistance. We have witnessed, for instance, Venezuela’s Chavez use his petro-dollars to buy $1 billion of Argentine bonds to help Argentina pay off its loans to the International Monetary Fund and lessen its dependence on the Washington-based institution. He has used the promise of low-cost oil in an effort to entice 13 Caribbean nations into a Venezuelan-led organization called PetroCaribe. Through the Venezuelan-owned American oil refiner CITGO, he has subsidized heating oil in New England.

Perhaps the most dramatic example in recent months of attempts to use energy exports to achieve political ends—and the subsequent disruption this can cause--was the Russian-Ukrainian gas dispute. On January 1, 2006, Russia cut gas exports to Ukraine after Ukraine refused to agree to a four-fold increase in the price. The price increase had been triggered, in turn, by Ukraine’s unwillingness to enter into a Russian-dominated economic zone (which could have had serious implications for Ukraine’s desire to join the European Union and NATO). This act led to sharp drops in gas supplies from Russia reaching European countries that depend on the pipelines that transit across Ukraine—and Russia charged that Ukraine was diverting gas intended for Austria, Italy, France, Hungary and other European states.

After several days, the confrontation was resolved. Ukraine agreed to accept a near doubling of the price of natural gas sold by Russia to Ukraine. But the episode underscored that in the energy-hungry world of the 21st century, conventional warfare is not the only type of conflict between nations. What would have been the cost to Ukraine if the gas had stayed shut off, not for days, but weeks or months in wintertime? This could cause hardship and economic loss equivalent to the damage that might be wrought by a conventional military attack. What might be the ramifications if, in circumstances of severe energy deprivation, a country might turn to desperate measures—taking control of pipelines or seizing oil tankers on the high seas? And what would the use of energy as a weapon mean in terms of traditional security guarantees? If Ukraine had been a member of NATO in 2005, what would have been the obligations of the other members of the alliance in such a situation?

Energy security is an indispensable part of national security, and our priorities should be set accordingly. In my remarks at the Brookings Institution on March 13, 2006, I outlined a legislative agenda that would help us advance real energy security. In particular, our goal should be to replace hydrocarbons with carbohydrates.

Secretary Schlesinger spoke forthrightly when he noted that “the transition away from conventional oil as the principal source of energy for raising the living standards of the world’s population … will be the greatest challenge this country and the world will face … The longer we delay, the greater will be the subsequent trauma.” But the difficulty of solving the problem does not make it any less necessary. President Bush understands this, as he indicated with his surprising declaration in his 2006 State of the Union address, “We are addicted to oil.”

To start, we must end oil's near monopoly on the transportation sector, which accounts for 68 percent of American oil consumption. I believe that biofuels, combined with hybrid and other technologies, can begin to move us away from our extreme dependence on oil in the next decade. Corn-based ethanol is already providing many Midwesterners with a lower-cost fuel option. Cellulosic ethanol, which is made of more plentiful and less expensive biomass, is poised for commercial take-off. Ethanol can be easily introduced into the current transportation infrastructure through E-85, a blend of gasoline (15 percent) and ethanol (85 percent), in combination with flexible-fuel vehicles, which use inexpensive, off-the-shelf technology to burn both regular gasoline and E-85. We must boost quickly both supply and demand for ethanol through incentives and mandates to increase the number of ethanol production plants, gas stations that sell E-85 and cars that can use it.

While we begin the transition at home, we should also reinvigorate and expand our energy partnerships abroad. I have introduced framework legislation that calls for a realignment of our diplomatic priorities to meet energy security challenges. Partnerships with foreign governments can help speed our conversion to real energy security and strike new global alliances. For instance, we can gain greater security from oil supply disruptions if we develop contingency plans in advance with India and China in conjunction with the developed countries that are members of the International Energy Agency. Many poorer states currently have no strategic petroleum reserves or other mechanisms for coping with a major supply disruption. If the U.S. and other developed countries work with these nations on emergency preparedness measures, we can reduce the risk of economic devastation and conflict among poor nations that might result from an energy supply shock.

We also must recognize that we live in an energy interdependent world, and America’s efforts to lessen its own petroleum use will not have their maximum potential geopolitical and global impact if other countries simply consume the oil we save, keeping markets tight, prices high, and the producers in control. It is by working with other major consumers, such as India and China, to develop sustainable alternative energy supplies that we can best improve our own energy security. At the same time, we must be realistic and acknowledge that oil will remain an important energy source. Therefore, it is in our interest to work with the oil producing countries toward better investment climates, greater political stability, improved environmental controls and other measures that will enhance the security of supplies.

At the coming G-8 meeting, energy will be at the top of the agenda. This will be an important forum where the United States can take the lead and explain to other nations that we are in a new energy era. The solutions to the problems faced by all countries—developed and developing--will come not from the traditional means of more drilling and more pipelines, but from major strides in efficiency and from alternative, sustainable energy options. In this commonality of interests there is cause for optimism. Despite our import dependence today, the U.S. is in a strong position to choose a different path, a path toward real energy security. These are problems that can be solved. We must act now. We must act together.