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Home Archive June 2009 Issue

June 2009 Issue

June 2009 Issue: We Are Not Out of the Woods

In its May Oil Market Report  the International Energy Agency announced that it expected oil demand for 2009  to be down on  average some 200,000 barrels a day over 2008 year on year demand.   It has also predicted that global electricity demand will be down 3.5% in 2009- the first time that demand for power will have fallen since 1945.  Yet oil prices have been increasingly steadily on world markets the last four months followed by accelerated retail gasoline prices in anticipation of the US summer driving season.  It is admittedly easy to get lost and confused in this flurry of contradictory numbers.  The real question that needs to be asked is whether the underlying fundamentals of what drove $147 a barrel oil in July 2008 have changed?  The answer is a resounding no. 

We are clearly not yet out of the woods in terms of the global economic recession. What fundamentally drove historically high retail gasoline prices in 2008 was prolonged global economic growth which was a good, not a bad, thing.  Price inelasticity and the ability of consumers to absorb an increasingly higher cost for transportation fuels maintained demand against a faltering and partially manipulated supply picture.  Less visible but more insidious has been the global lack of adequate investment in new upstream oil activities, tightening global reserve: production ratios, high and enormous speculation in oil futures’ contracts,  political turmoil and its cascading impact on oil prices all which contributed to what we saw in July, 2008. 

Unless the medium term future of the world is predicated on a collapsed Chinese economy, declining demographics in India, prolonged decade-long demand malaise in the United States and Europe, the end of the role of speculation in global commodities markets, and the sudden emergence and acceptance of alternative fuels in the transportation sector, oil prices will return with a vengeance.  In short, the present global economic recession is but a painful blip on the screen of an ugly oil future for consumers characterized by upward and severe oil price shocks.     

In this issue of the Journal of Energy Security we tackle some of these issues head on.  Captain (retired) David David L.O. Hayward tells us why China’s commitment to economic growth, which demands huge new quantities of oil, will continue unabated and what the global security implications are for its growing oil dependence.  As demand for global energy resources rebounds, Gal Luft highlights what the policy implications may be for India, Pakistan and other powers on the potential development of the Iran-Pakistan-India pipeline.   Again the IPI pipeline demonstrates the broad policy implications of energy well beyond its logical framework of power and transport.  Interestingly, the IPI pipeline could also be of benefit to the Russian Federation as it continues its quest for wholesale domination of the European gas market.  Here, Camilla Hagelund, of the Henry Jackson society provides an outstanding analysis of empowered Russia in an update of its activities in Europe; Phillip Cornell of the NATO School and Jochen Kleinschmidt have collaborated on energy and the security implications of the High North again involving Russia and other Arctic littoral states.

Drexel Kleber of the United States Department of Defense takes us through the DoD’s holistic approach to its own energy security with, under particular circumstances, the necessity of 'islanding' its own installations from the US electricity grid; finally, Jude Clemente talks about the new Smart Grid and how the introduction of this new technology brings with it a host of its own security concerns. 

As always, we welcome your questions and comments.

Kevin Rosner, Managing Editor, JES

editor@iags.org 

 

The US Department of Defense: Valuing Energy Security

The US Department of Defense: Valuing Energy Security

The Department of Defense is the largest single consumer of energy in the United States.  In 2006, it spent $13.6 billion to buy 110 million barrels of petroleum fuel (about 300,000 barrels of oil each day), and 3.8 billion kWh of electricity.  In pursuit of Energy Security the US Department of Defense is assembling a diversified energy portfolio tailored to the assets and needs of individual facilities necessary for national defense.  Without specifying it as such, DoD is taking a holistic approach to their transformation.

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China's Oil Supply Dependence

China is aggressively buying up commodities around the world including oil.  In fact the recent uptick in Q2 2009 global commodity prices, including June $73 a barrel oil, is partly attributed to China's natural resource stockpiling.  The other side of this equation is growing Chinese oil dependency and the security vulnerabilities this creates for the country and the world.  Is China on a collision course with other major oil importers and what are the implications of this for global security?

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The Security Vulnerabilities of Smart Grid

The Security Vulnerabilities of Smart Grid

Jude Clemente, an Energy Security Analyst at San Diego State University, warns that terrorists have long realized disrupting the US information infrastructure is a far less risky strategy than traditional military combat. The internet, for example, gives terrorists a readily available, mostly unguarded corridor where they can hide their location, select their entryway, and mask their identity.  With the advent of Smart Grid new vulnerabilities are emerging on the backbone of this modern technology. 

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Iran-Pakistan Pipeline: Iran's New Economic Lifeline

Iran-Pakistan Pipeline: Iran's New Economic Lifeline
Iran's nuclear ambitions and Pakistanis fleeing the Swat valley have drawn the world’s attention.  Behind the scenes however is the ever-churning issue of the Iran-Pakistan gas pipeline that could ultimately be extended to India.  If built, the Iran-Pakistan pipeline could create a new dynamic in the region offering Iran new and important political and economic leverage over its neighbors.  The pipeline also unwittingly helps Russia in its gas market stranglehold over Europe by redirecting potential Iranian gas exports elsewhere.  What should American policy makers be thinking about such a development and more importantly what are the options?
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Europe's Chance to Face Up to Russia's Energy Bullying

The Putin regime and Russian oil and gas companies are pursuing a crisis-exploiting strategy aggressively targeting the European energy market by wooing Azerbaijan, swaying Ukraine, and assailing Hungary.  These moves are aimed at undermining European plans for a Southern Corridor intended to reduce European energy dependence on Russia. While pursuing this aggressive strategy towards Europe, Russia is facing troubles in its Central Asian backyard with Turkmenistan now eagerly signaling to the West that it is not a Russian protectorate but open to Western engagement and investment. With cracks opening in the Russian strategy, the EU should exploit Azeri and Turkmen openness for engagement and investment to secure the Southern Corridor, which could decrease European dependence on Russia by exporting Central Asian gas to Europe while circumventing Russia.

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Energy and High North Governance: Charting Uncertainty

The Arctic High North and its management has already been signaled by the NATO Secretary General as an area of interest to the Alliance.  Russia has already made its move by planting a titanium flag on the Arctic seabed, by conducting military exercises in the region, and by declaring that already 20% of Russia's current GDP comes from the region.  Depending on ongoing, and certain to be future, natural resource assessments of the region's hydrocarbons the Arctic or “High North” could prove to be a region of cooperation or confrontation between those with an interest in its future.  

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