$150 oil: Instability, terrorism and economic disruption. U.S. Senate hearing 2009

Senate 111-105. July 16, 2009. $150 oil: Instability, terrorism and economic disruption. U.S. Senate hearing. 42 pages.


Senator Richard G. Lugar, IndianaEnergy security is a critical factor affecting nearly all of today’s foreign policy challenges. The American public increasingly understands that greater energy independence is a national security necessity, and that energy security should be a top diplomatic priority of our Government.

In today’s hearing, we’ll focus on key oil and gas producing areas of the Middle East, Africa, and the greater Caspian region, where political developments have major consequences for global prices and markets. A global economic downturn has reduced energy demand, bringing price relief to consumers and greater flexibility to markets, for the moment.

But predictably, the recession has also led to falling investment in the energy sector. The International Energy Agency projects that global investment in oil and natural gas production will fall by $100 billion in this year. Just last week, OPEC announced sharp reductions in production investment. These cuts come at a time when more investment is needed to counteract high oilfield decline rates.

When major economies start to recover, energy demand will rebound, causing markets to tighten and prices to rise. Under such conditions, markets will be highly susceptible to vulnerabilities that can produce severe supply shocks. Three vulnerabilities stand out as areas of concern for energy diplomacy. First, instability and conflict may disrupt energy flows and undermine needed investment. Second, governments may make supply and investment decisions based upon politics, and not economics. And finally, terrorist activity may threaten major energy infrastructure.

In the near term, if we fail to address these vulnerabilities, the prospects for economic recovery could be seriously imperiled. An oil price shock that hits just as the recovery is beginning and demand for energy is increasing would likely generate inflation, undermine market confidence, and increase the risk of conflict. Over the longer term, even if we hope for a conversion from a fossil- fuel-dominated economy to one that depends much more on renewable resources, failure to maintain consistent supplies of oil and natural gas in the interim could be debilitating to our economy and to our national security.

Senator John F. Kerry, Massachusetts, Chairman.  There is a striking overlap between the world’s sources of energy and the world’s sources of instability. And we need to take careful note of that. Iran, Iraq, Sudan, Russia, the Caucasus, Nigeria, Venezuela, are all on the front lines of our energy supply challenge, but also on the fault lines of our geopolitics. Too often, our foreign policy debate has failed to reflect the importance, the connectedness, if you will, of this issue. Look back to President Carter: Back in the 1970s, he tried valiantly to make this connection clear to our country and set us on a path, but regrettably, we diverted from that path and have done so frequently.

The volatility itself is a major problem in its own right. Last year, we almost reached $150 per barrel. By the beginning of this year the price had plummeted to less than $35 a barrel. Since January, we’ve seen prices double. These dramatic swings are, frankly, devastating to the economy, and make it very difficult to conduct business planning, investment, and so forth.

Many see a solution: Manage the demand. Globally, we can reduce demand by up to 11 million barrels by 2020, at little or no cost, through higher energy efficiency, natural gas substitution, and the removal of subsidies internationally. That is more than the entire output of Saudi Arabia in 2008.

The bad news is, supply risks are simultaneously growing. In Nigeria, the militant group MEND has been, regrettably, successful in taking oil infrastructure offline, cutting oil flows nearly in half, and leaving exports significantly below the government’s target. These conflicts are not easy to solve.

Underinvestment is another risk to supplies, straining the ability of Russia and other countries to bring new capacity online.

Phillip Carter III, principal deputy assistant secretary, Bureau of African Affairs, Department of State.

In many countries, only a small percentage of the population has benefited from natural resource revenues. Few governments have developed plans for the prudent and well-intentioned use of oil or mineral profits. Rampant economic instability undermines peace and security efforts. Moreover, undiversified and single-export economies have resulted in a ‘’Dutch disease’’ effect that has stunted economic growth and breadth across other sectors, most notably agriculture. Energy security, although important, is but one component in a broad range of issues-such as health, human rights, governance, democracy, and the environment-encompassing United States-African relations. But, in the end, the key to energy security in Africa is good governance.

As a net importer of oil, the United States relies on a diversified and extensive list of suppliers to import the approximate 12 million barrels per day to meet our current consumption needs. Two of the top 10 oil suppliers to the United States, Nigeria and Angola, are located in sub-Saharan Africa. Nigeria is our fifth-largest oil supplier, with around 661,000 barrels per day to the United States, and Angola is our 7th, with around 582,000 barrels per day. United States companies operate extensively in these countries, as well as in Cameroon, Chad, Equatorial Guinea, and Gabon. Because there are direct shipping lines between Africa’s west coast and the United States, West African states are strategically positioned to supply oil to the United States. Yet, in spite of their geographic advantage, these countries still face many challenges.

Nigeria, in particular, must address Niger Delta militant activity, the shut-in of available oil, oil bunkering, gas flaring, and gas-sector expansion, and the environmental impact of the energy sector.

The attacks in the Niger Delta are best described as routinely criminal. They do not represent the political vision of people striving for greater political rights and development for the region. Their frequency and potency demonstrate the challenges for the Nigerian Government’s ability to provide a secure environment for the people of the Niger Delta. The criminal acts are costly to the Nigerian people through stolen oil, lost opportunity, and infrastructure destruction. Nigeria has the capacity to produce over 3 million barrels per day. However, recent anecdotal reports suggest that it’s producing less than half of that. Poor governance and endemic corruption have also denied the vast majority of Nigerians hope for a better economic future. Despite its GDP of $220 billion, 92% of Nigerians live on less than $2 a day. These economic challenges exacerbate Nigeria’s already weak governance and security institutions. In addition to the criminal attacks on oil structures, and kidnapping in certain areas of the country, Nigeria also suffers economically from lost opportunities in gas, as a result of frequent gas flaring, which is also a detriment to the environment.

Dr. Richard J. Schmierer, Deputy assistant secretary for Iraq, Bureau of Near Eastern Affairs, Department of State  & William Hudson, Acting deputy assistant secretary

The Middle East alone holds two-thirds of the proven world’s oil reserves and 78% of these reserves are held by OPEC members. And, as a net importer of oil, the United States reliance-and that of Europe and Japan-on petroleum imports from the Middle East and North Africa is significant, and it’s growing.

Petroleum imports from Saudi Arabia, Algeria, Iraq, and Kuwait account for some 21.6% of our overall imports. The security of the U.S. energy supply is therefore very much part of our diplomatic and economic relationship with the key suppliers in the region. Our overarching approach to engaging the region is to pursue policies which promote regional stability, particularly in the gulf region. Stability helps reduce price volatility and its wider impact on both the United States and the global economy.

Guaranteeing adequate petroleum supply is a significant theme of our energy security relationship with Saudi Arabia. The Kingdom is the world’s leading producer and exporter of total petroleum liquids, and the third-largest petroleum supplier to the U.S. market. As OPEC’s major swing producer, Saudi Arabia plays a crucial role in supplying world markets with a stable and reliable source of petroleum. The United States also continues to develop and cultivate its relationships with other key oil-producing states in the region. Kuwait, the United Arab Emirates, Qatar, and Algeria are all vital partners in the energy field. Iraq is also of growing importance in the world energy market. It has the third-largest conventional oil reserves in the world, approximately 115 billion barrels, and the tenth- largest gas reserves in the world. However, due to years of war, sanctions, and underinvestment, Iraq’s oil production remains flat.

North Africa, Algeria remains an important player in our international energy strategy. It is the world’s third-largest producer of natural gas, and the ninth-largest producer of oil.

There is the important issue of physical energy infrastructure security. In response to the attempted attack, in 2006, on one of the world’s largest oil facilities, Abqaiq, in Saudi Arabia, we are partnering with Saudi authorities in the field of critical infrastructure protection. We have established a dedicated inte-ragency office in Riyadh to implement projects related to United States/Saudi critical infrastructure cooperation.

Richard L. Morningstar, Special envoy for Eurasian Energy, Department of State.  United States oil companies actually are probably the most active and the most successful, so far, as Libya is trying to revitalize its oil sector.  The Chinese are also active, but our companies have really taken the lion’s share, so far, of bidding on plots of-for oil production. China is having an increasing and heavy influence in Central Asia, with Turkmenistan as a case in point. China is building a pipeline, at its own cost, from Turkmenistan through to China, to transport gas. China has agreed to provide a $3 billion loan for exploration at a major project site in Turkmenistan.

The good news is that it’s good for China to get more gas. It’s cleaner energy. And if they can import a lot of gas from that area that’ll provide cleaner energy, it might free up supplies in other areas. The bad-news is that … gas that goes to China will compete with gas that could go westward.

It is hard for us to compete with China in some of these countries. It’s easy for Turkmenistan to make a deal with China, when China can come in and say, ”Hey, we’re going to write a check for X amount of money, and we’re going to build a pipeline, and furthermore we’re going to lend you money so that you can explore, and we will be paid back in gas that you, ultimately, deliver to us.” You know, that’s not a hard deal to accept. And we can’t compete in that way.

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