Since the State of Union address, President Bush has emphasized reducing oil dependence through technology and alternative sources. However, recent events across the globe have only confirmed that the U.S. faces serious challenges in energy supply.
The programs the president outlined were significant in direction, although modest in size. With goals of six to 19 years, the initiatives do not address immediate threats. The challenge is energy security — reliable supplies at reasonable cost. At more than $70 per barrel, the markets are reacting to a potential Iranian embargo that could trigger skyrocketing prices. Crude oil markets had little capacity even before Iranian tensions to meet growing demand in the U.S. and in Asia, due in part to radical change in industry structure.
More than 80 percent of global oil reserves are controlled by National Oil Companies, state enterprises which hold and operate their respective petroleum sectors. International Oil Companies, on the other hand, control only 8 percent but offer technical, financial and operating strength. NOCs pose a problem for the world economy, given that some of those with control of the world’s largest reserves are highly unstable.
In Russia, President Putin is consolidating his control over the oil sector, replacing the oligarchs (many of whom were deeply corrupt) with two massive state-run enterprises: Gazprom and Rosneft. Putin is within his rights to do so, however, the operation of this sector must be efficient. Rampant corruption remains unchecked, resulting in stalled production growth.
Energy security is a priority for July’s G-8 Summit, hosted by Putin in St. Petersburg. Russia must commit and contribute to providing reliable supply at reasonable cost.
Venezuela, boasting more oil reserves than Russia, poses yet another challenge. Petroleos de Venezuela (PdVSA), Venezuela’s NOC, is changing its contracts with the IOCs in order to increase control, expand domestic production and reduce its reliance on U.S. markets. A self-admitted political rival, Venezuela has nonetheless attempted to partner with the U.S. on energy policy. Washington should seek to work with PdVSA where we have mutual interests, while challenging President Chavez on his radical political agenda.
Iraq is another nation with huge reserves, but post-Saddam production is falling amidst political divisions. The country lacks a clear national mandate as well as the resources to restore production. The greatest danger for the Iraqi oil sector is regional fragmentation, complicating development and threatening civil war.
Two steps should be taken once structure is restored. First, all international companies should agree not to retain agents or pay bribes, and to publish all payments to the government. The petroleum sector must be transparent since the potential for Iraqi corruption is enormous.
Second, it may take years to write a new petroleum law, but the IOCs should be brought in soon on terms acceptable to the Iraqis. It is Iraqi oil, and their sovereignty must be respected. One solution is short-term service contracts guaranteed by export credit agencies, quickly established so that IOCs could undertake specific projects for a limited period. This approach would stimulate production while a long term petroleum law is drafted.
Energy insecurity — unreliable supply at an unreasonable cost — was years in the making. A solution will take years as well. In the meantime, Washington must work with the international community to develop enhanced knowledge, better tools and a greater will to effectively address international petroleum supply issues so that geopolitical threats do not inhibit future energy production.
J. Robinson West is the founder and chairman of the board of PFC Energy.
