Amy Myers Jaffe

Beijing's oil diplomacy

Chinas quiet shift to net oil importer status in 1993 marked a forced departure from the Communist Partys three-decade experiment in self-sufficiency and opened the possibility that China could, some day, be as vulnerable as other industrial nations to unexpected events affecting global oil markets. Being a net oil-importer should, logically, bring Chinas interests closer to those of the oildependent West. In 1990, China abstained when the US mobilised an international coalition to drive Iraqi troops from Kuwait. A future crisis, after China has become a major importer, might elicit a more supportive stance. But the change to Chinese interests and orientations also poses challenges for the West: in effect, the industrialised oil-consuming countries of the US, Europe and North-east Asia must convince an ambitious, energy-hungry China that secure supply for all requires a cooperative foreign policy. So far, unfortunately, China is taking a different tack.

Natural Gas and Geopolitics

By most estimates, global consumption of natural gas - a cleaner-burning alternative to coal and oil - will double by 2030. However, in North America, Europe, China, and South and East Asia, which are the areas of highest-expected demand, the projected consumption of gas is expected to far outstrip indigenous supplies. Delivering gas from the worlds major reserves to the future demand centres will require a major expansion of inter-regional, cross-border gas transport infrastructures. This book investigates the implications of this shift, utilizing historical case studies as well as advanced economic modelling to examine the interplay between economic and political factors in the development of natural gas resources. The contributors aim to shed light on the political challenges which may accompany a shift to a gas-fed world.

The Shocks of a World of Cheap Oil

Oil prices have been flirting recently with

Climate Change Would Increase the Water Intensity of Irrigated Corn Ethanol

25-130 per barrel, levels almost reminiscent of the oil shocks of the 1970s. Rising energy prices have been accompanied by the usual hysteria about dwindling supplies and potentially dangerous transfers of wealth, tempting policymakers to consider ways of dealing with a coming oil crisis. But contrary to much received wisdom, the energy problem looming in the early 21st century is neither skyrocketing prices nor shortages that herald the beginning of the end of the oil age. Instead, the danger is precisely the opposite; long-term trends point to a prolonged oil surplus and low oil prices over the next two decades. Paradoxically, this scenario of plenty could destabilize oil-producing states, especially those in the ellipse stretching from the Persian Gulf to Russia. And although the economies of the United States and oil importing developing nations would by and large benefit, the backfire of low oil prices could undermine U.S. policy assumptions and imperil U.S. interests.

The Economics of Pipeline Routes: The Conundrum of Oil Exports from the Caspian Basin

Changes in atmospheric CO2 concentrations, temperature, and precipitation affect plant growth and evapotranspiration. However, the interactive effects of these factors are relatively unexplored, and it is important to consider their combined effects at geographic and temporal scales that are relevant to policymaking. Accordingly, we estimate how climate change would affect water requirements for irrigated corn ethanol production in key regions of the U.S. over a 40 year horizon. We used the geographic-information-system-based environmental policy integrated climate (GEPIC) model, coupled with temperature and precipitation predictions from five different general circulation models and atmospheric CO2 concentrations from the Special Report on Emissions Scenarios A2 emission scenario of the Intergovernmental Panel on Climate Change, to estimate changes in water requirements and yields for corn ethanol. Simulations infer that climate change would increase the evaporative water consumption of the 15 billion gallons per year of corn ethanol needed to comply with the Energy Independency and Security Act by 10%, from 94 to 102 trillion liters/year (tly), and the irrigation water consumption by 19%, from 10.22 to 12.18 tly. Furthermore, on average, irrigation rates would increase by 9%, while corn yields would decrease by 7%, even when the projected increased irrigation requirements were met. In the irrigation-intensive High Plains, this implies increased pressure for the stressed Ogallala Aquifer, which provides water to seven states and irrigates one-fourth of the grain produced in the U.S. In the Corn Belt and Great Lakes region, where more rainfall is projected, higher water requirements could be related to less frequent rainfall, suggesting a need for additional water catchment capacity. The projected increases in water intensity (i.e., the liters of water required during feedstock cultivation to produce 1 L of corn ethanol) because of climate change highlight the need to re-evaluate the corn ethanol elements of the Renewable Fuel Standard.

The role of inventories in oil market stability

When the Soviet Union began to collapse in 1991, the Caspian region quickly attained salience in the international arena, focused initially around suspicions that the region housed Persian Gulf sized reserves of oil and gas. The oil industry’s interest in the area dates from the mid-1980s when Soviet leader Mikhail Gorbachev first seriously raised the prospect of foreign investment to develop the vast unexploited riches of the Caspian area. Then in 1991, the collapse of the Soviet Union rendered the reserves of the newly independent states of Kazakhstan, Azerbaijan and Turkmenistan of immediate interest.

The Impending Oil Shock: An Exchange

Generally, in many countries, market forces determine the process of setting up inventories and the determination of their size. Producers, consumers and speculators will arbitrage prices so that it will be profitable for someone to hold inventories to moderate fluctuations in the balance between production and consumption—if indeed it is profitable to do so. Similarly, the extent to which producers maintain excess production capacity is a decision made by individual producers based on the profitability of doing so. But in the case of energy commodities, it is reasonable to ask whether the management of inventories can be left to market forces. Arguments that energy is different and requires special interventions reflects the fact that oil, and to some extent, natural gas, is a vital input to the overall economy, and that substitutes are not easily available. In the private transportation sector, for example, there are very few, easily available substitutes for fuels derived from oil. The home heating fuel sector has more alternatives but in the short run, there are significant costs to switching from one fuel to another. The industrial and electricity sectors have somewhat more flexibility where burning of coal or use of nuclear power and other alternatives exist but fuel switching still has significant costs and frequently, logistical barriers. For military vehicles, with the exception of submarines, virtually no substitute is available to oil fuels. It is not an exaggeration to argue that oil is also a strategic resource, essential in time of war.

The Geopolitics of Caspian Energy

In the April–May 2008 issue of Survival (vol. 50, no. 2, pp. 37–66), Nader Elhefnawy argued that oil production is approaching its peak, with consequences that are likely to be dramatic. There will be increased risk of state failure and resource conflict; the economic balance of power among major industrial states will shift according to their relative abilities to adapt to a scarcity of fossil fuels; and oil producers will enjoy greater political power. Survival invited two experts on strategic energy issues, Amy Myers Jaffe and Michael T. Klare, to comment on Elhefnawys essay, and Elhefnawy to respond.

Natural Gas and Geopolitics: The Baker Institute World Gas Trade Model

The Caspian Basin region, (see map 3.1), the name by which the Central Asian and the south Caucasus states are now coming commonly to be known, has served as a ‘hot spot’ for international oil industry discussion and exploration activities since 1991–92, when the states of the region became independent members of the international community. Oil industry interest in the area dates from somewhat before that time, from the mid-1980s when Soviet leader Mikhail Gorbachev first seriously raised the prospect of foreign investment to develop the vast unexploited Soviet oil reserves. Since large reserves lay outside of Russia, the collapse of the USSR made oil and gas rich states like Kazakhstan, Turkmenistan and Azerbaijan, of immediate interest.

Nuclear energy in the Middle East: Chimera or solution?

This working paper describes a spatial and intertemporal equilibrium model of the world market for natural gas. Specifically, the model calculates a pattern of production, transportation routes and prices to equate demands and supplies while maximizing the present value of producer rents within a competitive framework. Data incorporated into the specifications of supplies and demands in each location are taken from a variety of sources including the United States Geological Survey, the Energy Information Administration, the International Energy Agency, the World Bank and various industry sources. A subsequent working paper uses the model to investigate the possible effects of a number of scenarios including possible political developments.