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IOA News Letters Summary

by Jean-Marie Chevalier Professor. Paris-Dauphine University-France

The energy industry is used to dealing with uncertainties and inventing scenarios to make strategic decisions. Four scenarios are introduced in the following. Starting with the most optimistic scenario, which assumes continuation of the globalisation process, to the most pessimistic one with escalation of social gap. For states and enterprises, three strategic priorities are open: a) improvement of energy efficiency, b) diversification of supply both in the type of resources and their geographical locations, and c) securing the installations. The consequence is an increase in
energy prices.

In 2001, world energy consumption was provided 40% by oil, 25% by natural gas, 25% by coal and solid fuels, 10% by hydroelectric and nuclear plants. Among the eleven OPEC countries that supply 42% of the world's oil, ten have populations with a Moslem majority. Those ten countries are directly concerned with the 11 September events. Even if the energy intensity of our economy has decreased since the first oil crisis, our dependency on oil and OPEC has not decreased significantly. However, the energy industry has for a long time been used to dealing with crises, risks and uncertainties; for a long time the energy industry has known how to build scenarios. The 11 September events once again put to public debate the question of the security of the Gulf oil supply and introduced a new issue: that of dealing with the safety of the energy plants and installations which could be preferential targets: gas and oil tankers, terminals, pipelines, storage facilities, nuclear installations, high-tension electric lines. To face these questions, we shall think about possible scenarios. This scenarios method does not give probability values for the scenarios but will underlie the policy and strategy priorities to be followed by States and enterprises.

Four contrasted scenarios:from continued globalisation to gap esclation.

The scenarios method is based on the concept of building several possible representations of the future world, with each representation being self sufficient. After September 11th four images can be outlined, from the most idealistic to the most tragic, from the continuation of globalisation to gap escalation.

THE CONTINUATION OF GLOBALISATION

The 11th of September is a minor setback as was the invasion of Kuwait by Iraq. The terrorists may have had a plan but it was tempered; the terrorist network is disorganised, a "rational" government is installed in Afghanistan, Moslem governments keep mass population and protestation movements under control, economic growth is not seriously affected. Russia and China contribute actively to globalisation, notably through WTO (World Trade Organisation). The price to pay for regaining globalisation is financial support generously distributed to friendly governments without paying too much attention to the way the money is used and shared. This scenario is mostly based on worldwide consensus in favour of a liberal growth pattern based on mass consumption. Obviously this scenario minimizes the conflicting balance of power that exists between the rich and the poor, between "normal" behaviour and "deviant" sensibility. In this scenario world energy geopolicy is not modified. Business as usual.

REGULATED GLOBALISATION

In this scenario, returning to order is more difficult and takes more time. September 11th after-effects are stronger especially in the poorest countries where governments have some difficulty in keeping angry populations under control. To prevent States from withdrawing into themselves, with dramatic consequences for some of them, some kind of solidarity or international mutualism is established to jointly and severally ensure better regulation of the world economy. International assistance and support to increase development is better co-ordinated, the poorest countries are invited to actively contribute to macroeconomics control, financial flows are kept under close watch, tax havens are hunted down. The environment becomes a stake for cooperation and solidarity. The price to pay for maintaining international order is increased. Economic growth slows down but is better distributed. The energy situation is that of smaller growth in the demand and is favourable to the development of renewable energy without drastic perturbations in the flows of natural gas and oil since exporting countries badly need corresponding income.

FRAGMENTATION

The first wave of terrorism expands. Other countries are targeted, rich countries and also poor countries where terrorism is an expression of political protest. Every State tends to withdraw into itself to face its own internal danger. The leading role of the State is reinforced together with an increase in cost for police and security. The momentum of the economies of the States tends to be more autonomous with respect to globalisation but the European entity stands thanks to the European currency, the Euro. The energy situation is such that oil flows are under threat of being cut, at least temporarily. It is advisable to increase diversification of the energy supply with respect to both the nature and location of the resource. Capital investment is more oriented towards Russia, which has a huge energy reservoir, than towards the Middle East region; most important is the priority given to the development of national resources, including for some countries, the development of a nuclear industry which is kept under strong watch. Environmental issues rank second, with a vision restricted to national issues. Priority given to national (indigenous) sources of energy results in price increases. With this scenario one travels much less, indigenous holiday trips are preferred to exotic tourism.

GAP ESCALATION

This is the worst of the four scenarios, that which supposes the persuasive power of the jihad spreads to millions of young Moslem people unemployed and hopeless in their own countries, whether they are developed or not. This threat was mentioned as early as last September in The Independent by the British newsman Robert Fisk who wrote: "The greatest military power of the World began to bomb the poorest and most devastated Moslem country. Which Moslem individual could agree with that?"  Gap escalation is the alliance of deprived population masses for whom globalisation does not bring much, who have nothing to lose anymore and might be ready for an increase in violence. Who is ready to outdo the Twin Towers attack? This gap increase obviously has strong economic roots, underlying all forms of underdevelopment and unfair sharing of the fruits of economic growth. It is particularly dangerous and destructive since it is, at the same time, global and national with targets chosen among international symbols as well as national political regimes suspected of being implicated in globalisation. In the scenarios, all of the possible energy supply outages should be considered since energy facilities become preferred targets of terrorists because of their potential for devastating effects. In this scenario, the important question is "how long can it last", keeping in mind that an enormous amount of wealth and income is involved. It is also important to keep in mind that the four scenarios are not exclusive of each other. One could live some months in continued globalisation then shift to a period of gap increase and later on to a regulated globalisation scenario.

Political and strategy priorities: efficiency, diversification and security

The four scenarios presented above have paramount quantitative implications. In the first scenario the growth of air transportation keeps its momentum and world energy consumption keeps on increasing without paying too much attention to environmental issues, especially in the USA. In the fourth scenario, the growth rate and pattern of energy consumption could be slashed for a rather long period of time. In the year 2015, prediction for world energy consumption can be drastically different, with difference ratio ranging from 1 to 1.4. This implies enormous financial consequences since the estimated surplus value for the oil industry alone (i.e. the earnings of exporting countries plus the income taxes levied on consumers and the oil industry) is of the order of magnitude of the French Gross Domestic Product-GDP (1400 billion euro). The political and strategic thought that comes from the description of the four scenarios teaches us a lot but, at the same time, does not surprise us much. In fact, the conclusions that can be drawn are in keeping with the trends of heavy changes for energy systems. The consequences of the 11 September events are the strengthening of the political and strategic issues that are today already revealed more or less explicitly. These consequences can be summarized in three words: efficiency, diversification and security. Those three answers or emergency measures are adapted, whatever the probability of occurrence for any of the four scenarios could be. Those three answers or measures lead to an increase in energy prices.

EFFICIENCY

Sudden awareness, since the Rio Conference, of climate change issues demonstrates the inclination that world energy demand cannot increase at the same rate attained in the past, even accounting for the needs of developing countries. One should invent new energy systems but first one should work on existing systems to increase their efficiency without jeopardising satisfaction of needs. This increase in efficiency responds to present worries since it decreases, quantitatively, our economic dependence on energy. Progress in efficiency is bound to provide signals and incentives as, essentially, prices, taxes and subsidies. Strong argument in favour of increasing prices and taxes on energy is that present taxation, on fuel notably, does not cover the entire social costs generated by transportation. It is very necessary that the policy statement take the form of a real decision, in a European Union frame that could be exemplary. Europe has been successful in building a rather strong consensus on Kyoto commitments; the time has come to increase the pressure towards significant improvement of energy efficiency and an active policy for public and private transport systems. It will be costly but all the components are there to explain to citizens and enterprises that this is an essential step forward in a long term vision of public good. This problem is too important to be left only to "green" political parties.

DIVERSIFICATION

Eleven September events show evidence of our dependency on both oil and gas products, and also on Moslem country producers. Certainly this dependency is a very relative concept to be looked at together with that of interdependence. We need their oil and gas but their national budgets sorely need foreign currencies. This interdependency in terms of dominant energy sources and geographical distribution has been a constant worry in the history of the oil industry, but no major and lasting interruption of supply has ever occurred (few days in 1957 because of the privatisation of the Suez Canal and a few days during an embargo in 1973). The question is raised again now since, as in the worst scenario case, exports from the Gulf could be partially interrupted. Breaks in supply could be caused by acts of sabotage and local attacks from dispersed but organised groups, and it is not certain if military intervention could be as efficient as it was during the Gulf war, disregarding collateral effects it could cause. These thoughts logically lead to political and strategic priority for diversification of both the nature and location of energy resources. Whatever the scenario is, such priorities are winning in the short, medium and long terms prospects, but the difficulty is that their implementation cannot be instantaneous. Better geographic diversification is the first concern for oil claims and permit portfolios (oil and gas exploration and production) of big companies. As early as September some Gulf projects were delayed due to renewed interest in Russia. Russia is indeed a huge oil and gas reservoir (containing about 30% of the natural gas world reserve, perhaps more), the economic structure of the country has improved, and the country suffers from an enormous need for investments to develop its natural resources and initiate new growth trends. President Putine has quickly understood Russia's interest in the crisis. The country has a win/win situation in the four scenarios. This necessary diversification of portfolios may be causing new mergers between companies since, in itself, size becomes an asset in facing the need for important investment capital and risk sharing. Rebuilding the portfolios may be accompanied by political initiatives. It is the case for the "Prodi initiative" launched vis-a-vis with Russia in 2000 by the Chairman of the Commission of the European Union to reinforce the energy flows from Russia towards Europe, notably for natural gas which, let's say it, could be a substitute to oil for some usages. The Russian risk takes advantage of the crisis, demanding that States be ready to take their chances to cover that risk; Russia is greatly wooed by Europe and the USA. Diversification of energy sources goes along with the stream for acceleration of the development of renewable and decentralised energies, essentially wind and solar. This development is already a European priority. The crisis will confront this orientation of major importance for the long term. Another worry deals with that of flexibility of the energy pattern to introduce, for a given usage, competition between different energy sources, a function of their availability and prices. This also works towards decreasing dependency. As for coal fuel, which is abundant and well distributed on Earth, it could be developed but with the prospect of "clean coal", at high cost. Considering nuclear power raises more complex questions. It is too early to know how the nuclear energy problems may be modified because of the 11 September events. In fact, two different items should be considered: the management of existing facilities with the security problems involved, and the future of nuclear horizons presently restrained by problems of funding and public acceptance. The future of the nuclear road under experimentation depends partly on the safety of these new technonlgies.

SAFETY

Safety of energy facilities has always been of major concern for the operators but it recently took on a new and terrifying dimension when considering that these facilities become possible targets -not so difficult to hit - for terrorist groups or for madmen. In the immediate future, security requirements such as reinforcement of technical safety processes, surveillance, control, protection and caution, and insurance premiums will probably result in very noticeable increases in price. These are valid for all industries but the energy sector reveals a vulnerability that was not previously considered. Suddenly every facility is being scrutinized for its security measures. If this worry about security measures is confirmed, it is clear that hazardous and very large facilities will be penalized, unless their centralization could facilitate the building of full proof systems but this is not very likely. On the contrary, it seems that decentralised small sized facilities using renewable resources, or even fossil fuel, may have lower security costs and are, as already mentioned above, more in accordance with the trends for energy systems. Efficiency, diversification and safety are emergency measures upon which industry and government could agree. Such measures should have an effect in raising the price of energy.

Extracted from ? Where goes global economy- scenarios and emergency measures?.
Jean-Marie Chevalier and Olivier Pastre - Edition Odile Jacob Feb. 2002- ISBN 2-7381-1128-9