October 12, 2018
Energy and Geopolitics: A Diplomat's View
Amb. Richard Morningstar, Chairman of the Atlantic Council Global Energy Center
Marine Biological Laboratory Falmouth Forum Lecture Series, Woods Hole, Massachusetts
October 12, 2018
I am very happy to be here at Woods Hole this evening. I want to thank Susan Morse who has been a friend for 45 years for suggesting it and Nancy Bridges for making the arrangements.
Tonight, I would like to focus on the intersection of energy and geopolitics. When one looks at energy issues, whether it be the behavior of oil markets, commercial energy projects, or new transformative technologies relating to addressing climate change, geopolitics and national security play a role. There are obviously other issues that intersect—such as legal, commercial, economic, and environmental issues. Any energy project has to be commercially viable, but that viability is often affected by geopolitics. While in the Government and now at the Atlantic Council, I have had the privilege of dealing with a whole range of energy issues from oil and gas markets, to traditional fossil fuel projects, to new technologies and the effects of climate change. Tonight, I would like to briefly give several examples of the intersection of energy and geopolitics. It is necessary to understand this intersection to be able to deal with specific issues and the major transformations taking place in the energy sector.
I will only very quickly touch on oil markets, because that is where the intersection with geopolitics is the most obvious. Disruptions of supply from countries such as Venezuela, Libya, and Nigeria, or the imposition of sanctions on countries such as Iran, have an obvious effect on global supply, price, and how major producers such as Saudi Arabia, Russia, and increasingly the United States react to disruptions.
The geopolitical connections relating to large commercial projects are more nuanced. I first became involved with energy in the mid-nineties. I was a special advisor to the President responsible for all of our programs in the former Soviet Union. At some point, it became obvious that energy resources in the Caspian Sea were becoming an important issue. There has been bipartisan support for our Caspian policy from the ‘90s continuing until today, which focuses now on Caspian gas going to Europe. Going back to the ‘90s, from a policy standpoint, the Administration felt that Caspian oil was important to offer new alternatives in supply. We felt it was important that not all pipelines from the region go through Russia, and to support the independence of new countries in the Caucasus and Central Asia. I talked to Strobe Talbott, who was Deputy Secretary of State, and told him that we needed one person to focus on coordinating these issues. He said, in effect, well, if you think it is so important, then you do it. It was totally random that I became involved with energy. And that is how I got involved in the creation of the major oil pipeline from Baku through Azerbaijan, Georgia, and on to the Southern coast of Turkey at Ceyhan. We strongly supported that route. There were three other alternatives from the Caspian; through Iran, through Russia, and third, to the Georgian Coast on to the Black Sea and through the Bosporus. Here is where the geopolitics come in. The US would not allow a pipeline through Iran because of sanctions at that time. And, further, why would you want new oil going through Iran subject to Iranian whims regarding the Strait of Hormuz? Regarding Russia, even the companies recognized that there were already enough pipelines going through Russia and, further, we were stressing the independence of these new countries. And, regarding the Bosporus, Turkey would not let anymore large tankers through. If you have been in Istanbul and seen how narrow the straits are you can understand why. That left only Baku-Tbilisi-Ceyhan. However, companies argued that the cheapest route was through Georgia and then out through the Bosporus. I remember a meeting at the White House where we were explaining our position. One of the companies argued that we had to let them go to Supsa on the Black Sea and through the Bosporus because it was the lowest cost. I said that was irrelevant because Turkey wouldn’t let it happen. If they wanted to get oil out of the Caspian, it would have to be through BTC. There was grumbling but finally everyone came to an agreement. At the same time, as policy makers, we had to recognize that the project needed to be commercially viable. We worked with Turkey to guarantee that the cost of the pipeline would not exceed a certain amount, which ensured the viability of the project.
A more recent example of the intersection of energy and geopolitics is the controversy surrounding the Nordstream 2 pipeline. That is the pipeline that would carry gas from Russia under the Baltic Sea directly to Germany and into Europe. You may have heard President Trump railing about this pipeline and all the money Germany pays Russia for gas, using that point to question why the U.S. should support NATO and defend Europe. Nordstream 2 is a real issue, but not for those reasons. The real reasons for which both the Obama administration and most in the Trump administration have opposed Nordstream 2 are that it would increase European dependence on Russian gas, which Russia has used as a political tool and could deprive Ukraine of transit fees on existing routes, which would send a terrible signal, given Russia’s actions in Crimea and in Eastern Ukraine. Poland and other Central and Eastern European countries have strongly opposed the pipeline. However, many in Europe have supported the pipeline, saying that it is a commercial project and geopolitics should not be a consideration, although Chancellor Merkel has recognized that geopolitics plays some role. So, there you have it, commercial issue or geopolitical issue, which should take precedence? Some in Europe say, why is it any of the U.S.’ business? I would argue that it is. Energy security relates directly to economic security and political security, which is clearly in our interest. On the other hand, as Hillary said several years ago to European foreign ministers, “we cannot want European energy security more than Europe does.” There are a lot of issues to be resolved on Nordstream 2 that we don’t have time to get into tonight but are worth briefly mentioning. Will steps be taken in Europe to diversify sources of gas supply including LNG imports from the US and other sources? Will gas demand stagnate or fall due to renewables and energy efficiency improvements? Will Europe continue to create more interconnections to further an integrated energy market to ensure that Russia cannot act monopolistically and will act transparently in a competitive market? Can a binding deal be made to protect Ukrainian transit and, if so, can Russia ever be trusted? And, finally, the difficult question of whether the United States should sanction Nordstream 2. We could discuss the pluses and minuses of doing this for the next 2 hours.
Another example, before going to climate change and new technologies, is the geopolitical and national security effects of the U.S. energy boom. At the Atlantic Council, we did a task force report a few years ago on this subject. I am sure we could debate here about whether our increased gas and oil production is a good thing or not. How environmentally damaging, for example, is fracking? Is this balanced by our having a much better record than Europe on reducing emissions because of the conversion of coal to gas in electricity generation? But there are also national security implications. Our increased production of oil and gas has added to our national security tool box. For example, just having liquefied natural gas available to ship to Europe is enough to force Russian gas prices to be competitive, even if little of our LNG is sold. China’s shift from coal to gas and its desire to import U.S. natural gas is environmentally important and could have an effect on our trade conflict. The availability of oil exports to Asia would have a positive effect in the event of a Middle East conflict. I could go on and on but let’s leave it at that and move on to climate change and new technologies.
I am sure that most people here would agree that our notice to withdraw from the Paris Climate Accords was really dumb and short-sighted. From a geopolitical standpoint, it was particularly stupid. By defaulting on climate leadership, we have allowed not just the EU but also China to take on a leadership role on climate change and we have enhanced China’s position as a leader on new energy technologies. Apart from the geopolitical impacts, this makes it more difficult for us in the development of new technologies, which has a direct effect on jobs and our economy. Furthermore, our default in this critical area of global leadership has a spillover effect into other areas. Our withdrawal from Paris, together with other decisions we have made such as withdrawing from the Iran nuclear agreement, drastically diminishes our credibility as a reliable partner and makes it more difficult to get agreement in other areas of strategic importance. It also enhances our potential adversaries, such as China and Russia.
The silver lining on climate change is that the cow is out of the barn and new technologies will continue to advance. The question is, what role will the U.S. play?
This is why, a year ago, we added a new pillar to the Global Energy Center to focus on climate change and advanced energy, which completes our original vision for an all-purpose Energy Center.
I do believe think tanks can play a unique role in the energy and foreign policy ecosystem, not just in Washington, but throughout the country and internationally. They can straddle government, industry, academia, and civil society in creative ways.
We at the Global Energy Center have been working on the geopolitical issues such as the ones I’ve discussed so far, but also in several areas regarding new technologies, all of which have geopolitical implications. This is an example of how think tanks continue to adapt and take on key important issues.
I’d like to take a moment to address just a few of the topics and technologies that most excite us, and the work that we are doing on them. All of these areas have geopolitical implications and relate to the complex issues of dealing with what technologies can best deal with climate change in the developed and developing world.
The first such issue is the rise of renewable energy. 2018 is poised to be the eighth successive year in which global clean energy investment exceeds $250 billion, a remarkable fact that should remind us all that clean energy is not an environmental niche nor an upstart category, but instead a mature and growing industry.
We are also seeing lower and lower prices, such as a successful 2017 bid of less than 2 cents per kilowatt-hour for a solar project, made by a consortium led by Abu Dhabi’s renewable energy company Masdar. This was the first time in history that the 2 cents threshold had been breached.
This is a big market. However, it remains unclear whether the US will play a leadership role in this energy transformation, in the same way that it has led so many previous energy transitions.
China is set to account for more than half of global solar deployment and electric vehicle sales this year. Beijing’s Belt and Road Initiative from China, across Central Asia, and on to Europe will accelerate China’s plans to become a clean energy powerhouse, and China is also poised to construct a network of high-voltage power lines across the Eurasian landmass. Add to this the fact that the U.S. will soon fall behind China in overall R&D spending, and the picture of an energy-rich, yet complacent, America emerges.
So, this clearly represents a high-stakes game for the United States - not only in deploying clean energy technologies but also finding a strategic, sustainable role to play in clean energy manufacturing and innovation.
But it is even more than that, we have heard a lot in recent decades about soft power and the need for the United States to exercise its soft power to win the admiration of people around the world. We have not been doing a very good job in recent years of serving as a model to emulate. We have to ask whether we are losing the soft power battle to a country like China. In fact, China is not the easiest partner for countries to deal with, but we have to come up with a real strategy to be able to compete in this new world.
Another area of interest is the future of transportation and mobility. The rise of renewable power is paralleled by the rise of electric vehicles, and perhaps one day autonomous, vehicles Electric vehicle sales reached a record 1.1 million worldwide in 2017, and Bloomberg New Energy Finance projects that electric vehicle sales will skyrocket to 11 million in 2025 and then surge to 30 million in 2030 as they become cheaper to make than internal combustion engine cars. This is in addition to the fact that their fuel and regular maintenance costs are already far less than traditional cars.
Again, China will lead this transition, as it is not only projected to account for half of the global EV market, but also to become an increasingly important manufacturer and global exporter of electric vehicles. As electric vehicle sales begin to capture a sizeable share of the global market, it raises new questions for energy markets:
When will the world reach “peak oil demand”? And once that peak is reached, at what rate will demand decrease? Opinions are all over the lot on these questions.
What will peak oil demand portend for prices, and for the world’s major oil producers?
And what, in turn, will this mean geopolitically? What, for example, would reduced volumes and lower prices mean for Russia? How would it affect Russian behavior? What about large petro states like Venezuela and Nigeria, which already face huge problems? Middle Eastern countries such as Saudi Arabia and the UAE are already strategizing to diversify their economies. We will see how successful they will be.
The Global Energy Center has started a new project, called “Shifting Gears” to look at these very questions by convening leading energy, transport, and geopolitics experts.
Another key contributor to decarbonized energy will be new transport fuels, especially for sectors such as shipping and aviation that are far harder to electrify than personal vehicles.
Some of our experts recently convened a roundtable on low carbon fuels at the September Global Climate Action Summit in San Francisco and were very excited to see how dynamic the market for low-carbon fuels has become.
Many of the technological and financial hurdles which handicapped the adoption of biofuels in the past are changing. Cost-competitive biofuel/distillate fuel blend purchases by the Defense Logistics Agency, growing use of renewable aviation fuels by Airports in Oslo, Los Angeles, San Francisco, and growing use of biofuels in the heavy transportation sector across the United States are all examples of the promise of next generation biofuels.
And as a quick aside, the Global Energy Center just received funding to produce a short paper on the future of biofuels and the policies needed to make them sustainable and scalable. An interesting area that needs to be worked on is certification of biofuels. By use of markers, purchasers have to be sure of what they are getting.
It is so important to have the US leading on innovation in this area, and scientists here in Woods Hole have been working on seaweed as a biofuel. We might be miles away from Washington, but the work being done here will shape the intersection between energy, markets, and geopolitics well into the future.
My final point is that we must double down on research and technology. There is no silver bullet in dealing with climate change. It will take an all of the above approach. We have to continue research in areas such as carbon capture and new nuclear technologies. I know nuclear energy is controversial, but we have to determine whether new generation nuclear technologies such as small module reactors can provide a cost competitive, safe, efficient clean energy source in countries as large as China to compete with coal as well as in electricity starved areas in Africa or other places. From a geopolitical and national security standpoint, we cannot leave the nuclear space to Russia and China. Safety risks and proliferation risks are too great and the potential benefits so large that we must have a stake in the game. We have formed a very high level nuclear energy task force to study these issues. We’ve talked about a lot of different areas, I look forward to your comments and questions.