Oil supply diversification: a panacea for energy vulnerabilities?

Communications on energy Oil supply diversification: a panacea for energy vulnerabilities?

The diversification of sources of imported oil has been suggested as one strategy to reduce the vulnerability of many western states to manipulation or disruption of those supplies for political or economic ends. For a variety of reasons - the limited number of oil exporters, levels of importer dependence, anticipated future shortages, and supplier interests among them -diversification strategies will have little impact on vulnerability reduction. Moreover if a large number of petroleum importers engage in diversification strategies, competition among those importers may lead to negative consequences. On the plus side, previously unknown resources may be found, contributing to global hydro- carbon reserves.

During the past decade many countries have announced policies to diversify and expand the number of suppliers of their imported oil. France and Japan started early, while others, like the Netherlands, are announcing such plans now. The chief reason for diversification is to reduce reliance on the small group of countries exporting oil, most of which belong to OPEC. Many OPEC countries are perceived as inherently unstable and/or willing to manipulate supplies and prices to their own advantage.

It is argued that diversification of suppliers would reduce the dependency western nations, in particular, have on that oil. In addition, diversification of suppliers could result in new discoveries, increasing the world's inventory of exploitable hydrocarbons. That could postpone the inevitable transition from the oil economy to some other; and, in the short term, render OPEC impotent.

Diversification is a haphazard word, implying any number of national strategies. It brings to mind a large number of suppliers, each providing a like percentage of national need: 100 supplier countries, for example, providing 1% each of the importer's requirement. Or, again, there could be one hundred suppliers, the first providing 99.01% of

need, the others 0.01% each. The population of suppliers could be the same in the two examples, but the implications of the diversifications are different.

Present practitioners seek to chisel away at major dependencies on the Middle East, and to fill the void in any way they can. One cannot argue against the merit of increasing the global inventory of exploitable hydrocarbons in the short- to medium-term. Such efforts are laudatory, particularly when they assist developing countries. Diversification may not, in all cases, bring about the predicted reduction of vulnerabilities; and it could, under certain circumstances, have a destabilizing effect.

Reduction of vulnerabilities

An expansion of the number of sources for imported oil will reduce the degree of dependence one country has on other suppliers. The first question which must be addressed is what degree of dependence constitutes vulnerability? If a 5% short-fall in imports is an emergency and a 10% short-fall a disaster, is not, then, a 5% dependency a significant vulnerability and 10% serious?

These figures, hypothetical as they

are, are not sufficient to assess vulnerability. Assuming no short-term oil substitutability, it is important to know what percentage of the national energy requirement is provided by oil, imported or domestic. Portugal, for example, is 80% dependent on oil, but produces none. In 1977, 39% of its oil imports came from lraq, 29% from Saudi Arabia, 16% from the USSR, 11% from Iran and 5% from Oman. In the UK oil constituted 39% of energy consumed in 1979, of which about 50% is imported, primarily from the Middle East. The UK, however, exports about half what it produces, and is not, therefore, a net oil importer. A short-fall of 5 % of oil imports constitutes a 4% total energy short-fall in Portugal, but less than 2% in the UK. The UK, moreover, could divert domestic oil intended for export to cover some of that deficit.

Countries which are net energy exporters or which balance imports and exports may nevertheless feel the supply dependency and seek to reduce it. Canada, until 1975 a net exporter of oil, has significantly reduced the volume of oil exported. In 1976 the government tabled a report calling for energy self-reliance for Canada. Self- reliance differs from self-sufficiency in the Canadian lexicon, for while self- sufficiency permits net provision of supply, self-reliance requires all domestic requirements to be supplied from domestic sources,

Given the wish to reduce supply dependencies, is it practicable or possible to reduce vulnerabilities? Supply dependence is straightforward, and is merely an expression of the volume of oil delivered by a particular source, and the percentage of national demand that oil constitutes. Vulnerability implies something else, being related to supply dependence, but reflecting the degree of harm an interruption in supply will constitute. It is possible to have supply dependency, and yet not be vulnerable. For example, it has been suggested that OPEC chose 1973 rather than 1967 to impose its embargo and the subsequent increases in price, for in 1967 the USA was insufficiently vulnerable, a condition which had changed by 1973. If alternative suppliers can be found at no cost (financial, political, or other) to

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substitute for supply disruptions, there is no vulnerability. The more difficult the substitution, the greater the vulnerability.

This substitution may take two basic forms. The first is to rely on other suppliers, if country A or company B will not or cannot provide, country X or company Y might step in and take up the slack. Alternatively there can be changes in consumer habits. Con- sumers may use either less oil by, for example, driving less or buying more fuel-efficient vehicles. Or, consumers could begin to use other energy forms, for example, the conversion of oil-fired electric generation plants to coal. It is important to remember supply dependence and vulnerability are affected by domestic as well as foreign influences. This is particularly true in the coal industry where labour unrest as well as the labour intensive nature of the industry has had significant influence.

Definition of crisis

Vulnerability is variable. No one country has the same set of problems as another. Yet, is there a point where the degree of vulnerability is so large that, in the short run, there are no consumer country policy options to limit or reduce that vulnerability. It was suggested above that a short-fall of 5% of impor t s constitutes an energy emergency and 10% a disaster. From the example of the UK, it is reasonably clear that this import criterion may very well not be valid. Perhaps energy emergencies and disasters are better defined as shortages of energy at some given level regardless of source. Thus a short-fall of 5% of imported oil in Portugal would affect 4% of available energy, while reducing available energy in the UK by only 2% - assuming domestic oil were not used to fill the void.

Two additional points are important to this argument. First is the degree of dependence any one country has on another and second is the ability of the consumer to reduce its dependency to a point below the level where a shut-off from the producer would result in an emergency. Portugal is dependent on five countries for its oil. Assuming no slack in the international market, if any

of the five suppliers were to cut off oil exports to Portugal, or if its chief suppliers were to reduce exports between 15 and 20%, there would be an energy emergency in Portugal.

If Portugal were able to diversify its imports, and reduce its dependency on its five suppliers, the effect of the diversification on reducing vulnerability would be insignificant until Portugal was able to reduce its dependency on its five and hypothetically new suppliers to no more than 5% each. It would have to reduce imports from Iraq by 34%, Saudi Arabia by 24%, and so on.

The vulnerability concept does not take into account that some suppliers are more trustworthy than others. The sole assumption is that there exists some energy short-fall level which constitutes an energy emergency. If any entity can control supplies at or above that level, vulnerability exists. One's perception of vulnerability will, however, be conditioned by the security of supply. We have seen in recent years that the security of supply is not always certain, that supply has in fact been significantly reduced either for economic or political reasons.

In sum, it will be extremely difficult for most western countries to reduce vulnerabilities since it will be extremely difficult to reduce supply dependency to below some hypothetical level. It is possible, however, to reduce the number of vulnerabilities.

Potential supply interruption

It is never possible to be certain that energy suppliers will be forever secure. We recognize the great potential for supply interruption in the Middle East, and exhort those responsible to reduce our dependence on unstable regions. It must also be realized that the more stable suppliers may not always remain so. Events in Iran since the fall of the Shah underline the fragility of stability. Little thought is given to the traditional suppliers of oil to the west. Yet remember that Canada, longtime major oil supplier to the USA, has reduced its exports from a high of 500 000 barrels a day in 1975 to virtually zero today. Canada now supplies about 4% of US natural gas needs, but could begin to

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reduce its share by continuing to refuse to permit any new licenses. Political tensions in Canada could also influence US energy supply. Some leftists have long argued that there is far too large a dominance by the USA of Canadian energy resources. The cure is to cut off the USA. Current disputes between the producer provinces and the central government might also have a profound impact on Canadian-US energy relations.

Third World suppliers, now politi- cally stable might follow the Iranian lead, and significantly disrupt the international oil market. What is the probability that there will be revolution or at minimum a change of foreign policy in Venezuela, Mexico, Nigeria, or Indonesia, not to mention Saudi Arabia and the other Arab states?

Reducing the probability The probability of supply interruption can be reduced by selective diversification and by reduction of dependence in unstable areas. The ability to significantly reduce the probability is constrained in two ways. First, most major oil exporters are in unstable areas and it will be difficult to replace that supply. Second, one cannot be certain of the long-term stability of any entity. And even where long-term stability seems certain, there may be political reasons to avoid major depen- denc i e s - the USSR is one of the largest producers of oil in the world, but most western states would be reluctant to become too dependent on the Soviet Union.

Reluctance for political reasons works both ways. Some suppliers are equally reluctant to become too closely associated with just one consumer. Mexico has to date refused to become a major supplier of oil to the USA because it fears the build up of an even greater asymmetrical interdependence and the instability resulting from a rapid influx of petrodollars.

Diversification will have little likely impact on reducing vulnerabilities for most developed countries. It could, however, reduce the likelihood that supplies will be interrupted. This could occur in several ways. First, as already argued, reliance on suppliers less likely

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to reduce supplies reduces the probability of interruption. Diversification also carries another connotation. As developed states diversify, they will very likely participate in exploration for, and exploitation of, resources throughout the world, thereby increasing the volume of exploitable resources. Japan has taken the lead by entering into joint exploration and production agreements with a number of developing countries. Japan provides much of the knowhow and capital in return for preferential access to the resource. As these resources come available, it could be possible to reduce dependency on resources in relatively more unstable areas.

Third, those countries which can are now increasing incentives for domestic oil, natural gas, coal, and uranium production. Norway, Canada, the UK, Australia, and perhaps the USA could in time provide ever increasing per- centages of their national requirement. All countries have implemented pro- grammes to reduce oil consumption through conservation. As domestic production increases and consumption decreases, the impact of supply interruption will be reduced. As oil becomes less important in any national energy equation through conservation and conversion, vulnerabilities will be reduced.

It follows from this that oil policy should be part of more than energy policy, it should also be included in defence policy. Reduction of vulnerabilities and of the probability of supply interruption would in turn reduce the likelihood of major conflict, and would also reduce the ability of other powers to manipulate domestic and foreign policy in many countries.

Problems of diversification

Barring exceptional circumstances, diversification will have little effect on reducing vulnerabilities, particularly in the short-term. Diversification could also contribute to destabilization. Di- versification strategies, if adopted by a large number of consumer-importers, could lead to increased competition among consumer-importers for scarce resources. That might also result in increased competition among consumer-

importers, resulting in perhaps increased prices and ultimately in armed conflict.

Further diversification might also result in greater importance of an increased number of producer-exporters. That, in turn, increases the probabili ty of domestic instability and international conflict in and between producer-exporters . Not all future wars will be conducted in periods of oil surpluses sufficient to offset the resulting reduced production as in the case of Iran.

New suppliers Increased diversification will result in a broadening of strategically important areas, perhaps expanding the application of the Carter doctrine. It may, therefore, become necessary to develop a greater western presence in many of the developing producer- exporters to offset real or perceived Soviet interests. Moreover, the greater the number of important producer- exporters, the greater the likelihood that one or some may choose to manipulate supplies for political and/or economic advantages. And as the world oil surplus turns into the projected shortage, consumer-importers will become evermore vulnerable to such machinations.

Increased diversification will result in the creation of a number of new petrodollar rich societies. The influx of money and modernization may lead to revolutionary changes, perhaps like those in Iran, alienating friends and neutrals. Hence oil resources may more and more be found in the hands of governments hostile to the West and more particularly to the USA.

The advent of OPEC and the flexing of its oil muscles have resulted in a significant shift in international relations and power. New suppliers will also seek to express their new status as their importance as oil suppliers increases. There is already a percep- tible change in US-Mexican relations since the announcement of significant oil reserves in Mexico. Mexico has become more assertive in its dealings with the USA. Is there any reason to believe that other newly powerful states will not also seek to redefine

their relationships with the developed west and the socialist east? If the effort to redefine those relationships is too precipitous, unplanned, or unantici- pated, the results could have new and profound effects on global relations.

As the number of suppliers increases and as they expand their export volumes, one must also consider the relationship these suppliers will have with the old. At present, all non-OPEC exporters have taken advantage of the OPEC price. It is, therefore, likely that present and future non-OPEC suppliers will continue to take advantage of OPEC price leadership and raise their prices accordingly. If non-OPEC suppliers begin to provide an ever more important share of oil in the world market , consumer states may attempt to use these new actors to break the OPEC cartel. That could happen, reducing the political and economic significance of OPEC. On the other hand, given projected global oil shortages, any such action might strengthen OPEC and could lead to some form of retaliation.

It seems likely that the relationship between OPEC and non-OPEC suppliers will depend on the status of world oil supplies. Given sufficient surpluses, the OPEC and non-OPEC model would likely be competitive, open to manipulation by consumer-importers. Given shortages, non-OPEC members will likely continue to take advantage of OPEC price leadership, although they may eschew supply manipulation for political advantage. There would thus be at least implicit cooperation between OPEC and non-OPEC suppliers, further reducing the political and economic importance of the west.

Diversification of oil suppliers can have destabilizing effects, some of which can be anticipated, others which cannot. Some concern developed country relations, others North-South systems, and still other East-West relations.

Conclusions

Significant diversification of oil and other energy suppliers has been pur- sued by policy makers in several developed countries as one means to further reduce supply dependency on a small

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number of countries. This shift in dependency is seen as one means to reduce the vulnerabilities many countries now face. It is theoretically possible that supply diversification will lead to reduced vulnerabilities, although this possibility contains a set of stringent conditions. Given the distribution of oil suppliers, their political and social organization, and the deep rooted problems of the Middle East, it is unlikely that diversification will lead to a significant reduction of vulnerabilities.

To reduce vulnerabilities no country or group of countries can control more than a small proportion of the energy supply of another. It seems likely that only a few developed countries can develop the supply system necessary to insure that they will not be seriously affected if supplies are reduced or cut-

o f f , particularly given anticipated world oil supply shortges. One caveat: vulnerabilities do not exist, no matter the extent of dependence, when alternative supplies exist which can be exploited quickly at little or no cost. This condition may have once existed, and may still exist to a limited degree today for a small number of countries.

Despite the fact that supply diversification may not reduce vulnerabilities and is therefore not the panacea for the world 's energy problem, it may have some positive effects. It will likely stimulate exploration in areas previously untouched, increasing the global supply of hydrocarbons. It could increase the volumes of exploitable hydrocarbons in developing countries, reducing their dependence on expen- sive imported fuels. Diversification can also increase the amount of relatively

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' secure ' supply available to consumer- importers.

Diversification may also have certain destabilizing effects, including competition for supply among developed countries; alienation of developing countries; increased potential for domestic and international conflict; and radicalization of society in developing supplier countries. Diversifi- cation of oil suppliers is a concept which sounds good in principle. It will do little to reduce vulnerabilities, but approached carefully many have several positive results.

Wallace C. Koehler University of Tennessee

Knoxville, USA

Nuclear power: the enduring connection

This article focuses attention on the extent to which initial euphoria on the prospects for nuclear electricity is related to the distinct character and the political significance of the nuclear industry. The nuclear debate stands to benefit considerably if the excessive and, at times, uncritical official faith in nuclear power as a cheap and abundant form of energy is examined in this context. Because, even if it was for the resource limitation alone, thermal reactor electricity could not possibly be abundant or very cheap on anything approach- ing the rate of growth initially envisaged. Furthermore, cost calculations were - and still are - based on unrealistic, or at best untried, assumptions. Last- but not least- there is a significant grey area on the boundaries between the conventional economics of nuclear electricity and the unconventional economics of plutonium production which makes conventional cost-evaluations hard to understand in the first place.

A number of important issues in the energy debate stem from the unique position of the nuclear industry v/s-~- vis the other energy industries. The uniqueness is summed up in the pro- position that the process which produces nuclear electricity produces also plutonium which in turn can be used to produce either more electricity or nuclear weapons. This makes the civil and the military activities of the industry both co-existent and insepar- able and opens the way to a number of

issues well beyond the domain of energy.

Yet it appears that one of the ground rules of the debate is to treat the nuclear industry as an energy industry in its own right. This introduces a note of unreality, for it was the military significance of the industry that played the dominant role in its development; the risks associated with the technology have been taken for the benefit of producing plutonium. Following from that, the economic viability of nuclear

reactors as producers of electricity could not have been an issue at the time nor indeed anything related to the con- straints imposed by the economics of the real world. Nuclear electricity appeared initially in the national grid as a welcome by-product of the plutonium producing activity and the electricity generating system was promptly geared to accommodate it.

The years that followed saw a gradual shift of emphasis towards the energy potential of the nuclear industry. Though it may be idle to speculate on the extent to which this apparent transformation was prompted by energy considerations it is significant to recall that, given the psychological and political realities of the first post-war years, the survival of the nuclear industry on its war record was far from easy. In political terms the case for over- stating the advantages of nuclear electricity could hardly have been stronger; it had become obvious that the future of the nuclear industry was dependent on the extent to which the public in the West could accept nuclear energy as an attractive answer to the world's needs. Success on this point could in time vindicate the nuclear industry; those with a longer memory were offered the spectacle of an industry trying with remarkable success to prove that the crude force which devastated

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Oil supply diversification: a panacea for energy vulnerabilities?