DEVELOPMENTS

The Middle Eastern economy has thrived on oil profits since the 20th century, with six Middle Eastern states making the list of the world’s top 15 oil exporters.  As oil prices soared to $147 a barrel in July, Saudi Arabia stood by a June pronouncement to increase output above its average production rate for the remainder of 2008.  The move by the House of Saud was the product of many forces—Saudi Arabia’s geopolitical interests, diplomatic pressure from developed countries with diminishing reserves, and security concerns regarding Iranian profits from inflated oil prices. The announcement was approved by Abdallah bin Abd al-Aziz Al Saud, who has served as King and Prime Minister since 2005.

As demand for oil rises, and proven supply plateaus, the method by which oil exporting countries in the Middle East (particularly Saudi Arabia) handle their dwindling supply will determine the viability of those countries’ political and economic systems.  OPEC member states will have to decide how to bolster their GDP with income from other sources while oil supply dwindles.  Governments that fail to solve this puzzle could find themselves out of power.

Saudia Arabia has launched several political and economic reforms.  How it shifts away from being predominantly a petro-state will determine oil's future role in the Middle East.  There are two possibilities.  First, oil could become a dwindling resource that will be increasingly less important to economies of OPEC countries.  Or, second, these countries may use the dwindling oil supply as a crutch, threatening stagnation and regional insecurity, as they continue to myopically rely on oil as the lucrative guarantor of economic security.  Under the former scenario, countries will follow Saudi Arabia’s lead in finding outlets for private industry through industrial manufacturing, education, and other industries that will enable them to successfully transition from primarily petro-based economies to more diversified economies.  In the latter possibility, the results could produce any number of vices, such as corruption, mismanagement, or unfulfilled promise of new resources.

BACKGROUND

Oil provides 40% of the world’s energy, and 96% of the world’s transportation energy, according to the Institute for the Analysis of Global Security.  The Institute predicts oil consumption will increase by 60% between now and 2020, propelled by rising demand in China and India.  Of the Middle Eastern nations that hold in aggregate 66% of global oil reserves, 20-25% of the world’s proven oil reserves are estimated to be in Saudi Arabia.  If oil production continues at its current pace, the Institute estimates that by 2020, 83% of remaining proven oil reserves will be controlled by Middle Eastern nations.  This not only raises questions about what new forms of diplomatic leverage these oil exporting states might exert over their client states, but also how this leverage might affect the Israeli-Palestinian conflict or the U.S. presence in Iraq or Afghanistan.

As the world’s largest producer and exporter of total petroleum liquids, Saudi Arabia is a key player in the Middle East’s energy future.  Its state-owned oil company, Saudi Aramco, effectively runs the national hydrocarbon sector, subject to the supervision of the Saudi Ministry of Petroleum and Mineral Resources and the Supreme Council for Petroleum and Minerals, which comprises the Saudi royal family, industry experts, and government ministers.  

Petroleum accounts for 45% of Saudi Arabia’s GDP.  But it is the other 55% that has drawn much of Saudi Arabia’s attention recently.  Acknowledging the need for diversification, the royal family developed the Saudi Arabian Basic Industries Corporation (SABIC), a major national producer of industrial materials.  SABIC is estimated to produce 48 million tons of the goods by 2010.  Sovereign wealth funds, foreign asset investment, and the creation of government-supervised credit institutions for foreign direct investors have also allowed Saudi to nurture its private sector GDP growth, which in 2002 was at 4%, compared with less than 1% growth in overall GDP.

The reforms in Saudi Arabia are not just limited to business.  High unemployment rates among Saudi males have prompted political reforms.  The first big step came in 2005, when the royal family organized and held the first elections for representatives in 178 municipal councils across 13 provinces.

But even these political reforms might not be enough to ensure Saudi Arabia’s continued resilience if oil runs out.  A rising Shi’a Iran has sparked concern. The House of Saud may feel threatened by Iran’s nuclear ambitions, even though some analysts believe the Saudis have sought their own nuclear weapon for years.  

ANALYSIS

Saudi Arabia's options for leveraging its proven oil reserves appear to fall into three categories.  There is a nuclear option (figuratively speaking), a hoarding of reserves option, and a middle path that would leverage its resources to assure a blend of sustainable political and economic reforms while also deterring regional aggressors.
 
Saudi Arabia is unlikely to pursue a nuclear or disruptive option with its oil for two reasons. First, the reputational effects Saudi Arabia would suffer for reneging on its commitment not to use oil as a political weapon and second, the time and resources required to boost capacity to the level desired to achieve these objectives would be costly.

The hoarding option is also unlikely in the near future because Saudi reserves will last for 80 years at current production rates, far longer than the average non-Middle East producer’s (15 years).  With such disparity, Saudi Arabia can afford to continue current levels of production and retain superlative profitability on its production in the long term, provided supply remains constant or continues to rise.

The most likely path for Saudi Arabia is the one it is currently pursuing – to be a leader in reconciling developed nations’ needs for oil with the interests of OPEC states.  Positioned at this fulcrum, Saudi Arabia can continue to get the foreign direct investment it needs to ensure the success of its continued efforts to diversify its economy, and by so doing, ensures the success of its incremental political reforms, all while preserving the stability of its society and a security guarantee against possible Iranian hegemony.  For the U.S., this means that Saudi Arabia will continue to be one of its best and closest partners in the Middle East for years to come.
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Foreign Policy Digest Editors

DEVELOPMENTS

In 2004, Dr. Chris Mardon and Tom Mackenzie co-founded Energy Mad with the goal of reducing climate change through economical energy savings.  Less than four years later the company announced a new initiative to solve the carbon emissions problem one household at a time.  Energy Mad has created the first auction and trading system for individuals and families to go carbon neutral.

Since its founding, the company has been on the cutting edge of energy efficiency.  It patented ’the Ecobulb,’ an ultra bright, high compact bulb which lasts up to 10,000 hours (ten times longer than most energy-saving bulbs).  The bulbs are estimated to have produced NZD 350 million (approximately $239 million U.S. dollars) in consumer electricity savings and reduced CO₂ emissions by 1.06 million tons.

On Friday, Energy Mad announced that it will provide one million Ecobulbs to a (yet unknown) developing Asian country.  The initiative is part of an international commitment on behalf of developed countries to reduce carbon emission in developing countries known as the Kyoto Protocol Clean Development Mechanism. Energy Mad’s campaign puts the responsibility for solving climate change in the hands of individuals.  Only a few years ago, the international community first came together to discuss the impact that individuals had on the global environment.  International treaties prompted countries to take responsibility for their population’s actions.  Local governments provided incentives for individuals to conserve energy and reduce their impact on the environment.  Now Energy Mad’s Ecobulb and other innovations have made it possible for every New Zealander to completely offset his or her household emissions.

BACKGROUND

For the last twenty years countries have been researching and investing in technologies to cut greenhouse gases and carbon emissions.  It is now widely accepted that greenhouse gases have contributed to global warming and climate change.  In 1997, a number of countries convened the Kyoto Protocol in order to address the harmful effect of greenhouse gases in contributing to global warming. The international treaty now boasts membership of 182 countries.

But one country is notably absent from that list: the United States.  The U.S. is the only developed country that has not signed the Kyoto Protocol.  Although President Clinton gave verbal support to Kyoto, President Bush declared the Kyoto Protocol fundamentally flawed in 2001.  He then announced the launch of a “science-based response to global warming.”  The Bush administration argued that the National Academy of Sciences report, which established that the increase in greenhouse gases was in large part due to human activity, was incomplete.  Without more information on natural climate fluctuations, a reliable estimate on how fast warming could occur, or an assessment of whether human actions could reduce warming, the United States would be best served by not signing the Kyoto Protocol.  Other Kyoto-critics argued that the limits on CO₂ emissions would disproportionately hurt U.S. companies as compared to their counterparts in other developed countries.

But in response to the President’s decision to reject Kyoto, American companies, state & local governments, and individuals launched their own initiatives to combat climate change.  Ford, General Motors, DuPont, BP, Exelon and a number of other large American companies teamed up with NGOs and think-tanks to form the U.S. Climate Action Partnership (USCAP).   USCAP advocates for mandatory emission limits and has been successful in promoting a number of bills before Congress that could cut carbon emissions by 60% by 2050.

A new bill before Congress aims to reduce carbon emissions in the U.S. by implementing a cap-and-trade system.  The cap-and-trade model is controversial because it allows companies to continue releasing greenhouse gases up to a limit, provided that they have bought the right to do so with carbon credits.  In such a system, Congress would set a nationwide cap on how much greenhouse gas can be emitted, and each year the cap would be lowered.  The biggest firms would get a credit for how much they could individually emit, based on their need, and they could trade/sell these credits amongst themselves.  For example, if company X has reached the limit of how much carbon it can emit in a given year, but still needs to produce more widgets (and each widget produced causes more carbon to be released), it can buy additional carbon credits from company Y which is well under its limit for carbon emissions for that same year.   Ten mid-atlantic and northeast states have adopted their own cap-and-trade program known as the Regional Greenhouse Gas Initiative.

Proponents of the cap-and-trade model argue that this is the most realistic way to lower the overall carbon emissions in the U.S., but critics claim that letting some companies pay to pollute undermines the entire system.  Alternative policies include taxing all companies for the carbon they produce and investing the proceeds in climate change research and other environmental protection measures.

ANALYSIS

Energy Mad is not the first social entrepreneurship organization to operate in the area of climate change, but it is one of the most successful.  In 2007, Deloitte, one of the world’s leading consulting & audit companies, announced that Energy Mad was the fastest growing business in New Zealand.  In three years it increased revenue growth by 2746% (yes, you read that right).  No doubt that the profit incentive behind ‘green businesses’ will continue to inspire other entrepreneurs to address climate change.

But profit isn’t the only reason why individuals, communities, non-profits, and business leaders are tackling emissions.  Environmental stewardship grows as people learn more about the relationship between environmental degradation and rising energy and food costs.  Although the presidential candidates will try to convince us that their leadership will lead us out of the energy crisis, there is plenty of evidence to show that much of the work can be done ourselves.

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Olivier Kamanda is Editor-in-Chief of Foreign Policy Digest.

DEVELOPMENTS

With U.S. gas prices rising to record levels over the past year and contributing to fears about the national economy, both presidential candidates are focusing on the need to change U.S. energy policy.  A major cornerstone of Barack Obama’s energy policy has been the promotion of alternative energy sources, particularly biofuels. John McCain, on the other hand, has particularly emphasized the need to expand domestic drilling, especially offshore drilling.  Both candidates agree, however, on the need to develop energy independence from foreign oil suppliers.

Yet while the U.S. remains nowhere near its goal of energy self-sufficiency, Brazil managed to reach this major milestone in 2006 despite having significantly lower domestic production of both oil and natural gas than the U.S.  Moreover, as one of the so-called BRIC countries—a term coined by Morgan Stanley to designate the world’s major emerging economies that also includes Russia, India, and China—Brazil is currently experiencing its strongest period of economic growth since the 1970s. This is due in no small part to rapidly increasing production of ethanol, oil, and other alternative energy sources.  Brazil has long supported the platform, now embraced by the candidates, of harnessing technological advances to expand offshore oil drilling and replacing oil with renewable energy sources. It has achieved remarkable success on both fronts.  By combining careful long-term infrastructure planning, agriculture & technology advances, selective drilling, and sound government energy policy, Brazil has been able to make the most of its abundant natural resources and reduce dependence on foreign oil.  A closer look at the energy situation in both countries can reveal what, if anything, the U.S. can do to replicate Brazil’s successes in achieving energy independence. 

BACKGROUND

Both the U.S. and Brazil are amongst the world’s top ten largest countries in terms of economy, population, and landmass.  In addition, the U.S. and Brazil are home to two of the largest biofuel industries in the world.  While the U.S. biofuel industry is slightly larger, Brazil’s industry is considered more economically honest, since it does not rely on heavy agricultural subsidies or tariffs to protect its domestic industry.

More importantly, Brazil produces its ethanol from sugar, which is more than four times as efficient as the corn-based ethanol used in the U.S.  While estimates of the amount of energy produced by corn ethanol vary between 1.25 to 1.5 times the amount of energy required to produce it, Brazilian sugar ethanol produces 8.2 times as much energy as is used in production.  Cheaper ethanol prices have helped Brazil surpass the U.S. as the world’s largest ethanol exporter, and domestic use continues to grow rapidly.

The remarkably high rate of ethanol consumption in Brazil is not merely the product of low ethanol prices, it is the result of three decades of investment by the Brazilian government in infrastructure to allow the widespread use of ethanol.  Following the first oil shock of the 1970s, the Brazilian government began to promote the consumption of flex fuel vehicles that could run on any combination of gasoline or ethanol.  The government appealed to consumers by allowing them to purchase whichever fuel was less expensive based on prevailing oil prices.  This required long-term investment in a broad network of flex-fuel stations offering both ethanol and gasoline.  As a result of such investment, currently 90% of new Brazilian vehicles have flex-fuel engines, and bio-fuel constitutes 40% of the fuel used by cars in Brazil.  As sugar-based ethanol use in vehicles has grown, it has expanded to other areas of energy use.  Brazilian ethanol is now poised to provide 15% of the nation’s electricity in the near future and its biodiesel industry is growing quickly as well.

Even if the U.S. were to heavily subsidize flex-fuel cars to expand its domestic consumption, it would be years before it could match Brazil’s flex fuel infrastructure.  Moreover, the amount of crop that would be needed to radically expand the use of corn-based ethanol could exacerbate rising global food prices and degrade the environment.  Unlike corn, a crucial component in the global food chain, expanding sugar cane production has minimal impact on global food prices.  Furthermore, while the destruction of wetlands to create new land for corn farming has been blamed for intensifying recent floods in the U.S. Midwest, agricultural advances in Brazil have permitted virtually all expansion to occur on land that was previously used as pasture or farmland, and significant room remains for future expansion.

ANALYSIS

The U.S. possesses many advantages that Brazil does not in developing its potential for alternate energy and expanding oil drilling.  The U.S. has a larger economy, more resources to invest in research and development, and a larger supply of important natural resources such as oil and gas.  However, Brazil stands as an example of the feasibility of energy independence.  Through careful planning and sound policies, Brazil has shown energy independence can be achieved by making the most of natural resources that it has.  Moreover, while Brazil has benefited from increasing offshore drilling by discovering the world’s second largest new oil field in two decades in November 2007, it is not dependent on expanding its domestic oil production to meet its energy needs.  Brazil has clearly staked its energy future on continuing to improve the capacity of biofuels to meet an ever-growing proportion of the nation’s energy needs.

The energy self-sufficiency currently enjoyed by Brazil is unlikely to be achieved by the U.S. in the near future.  Yet, the U.S. can succeed if it quickly reduces its production of greenhouse gases and its dependence on foreign oil by taking advantage of the expanding production of sugar-based ethanol in Brazil and other countries, as opposed to trying to replicate Brazil’s success from scratch domestically.  A necessary first step would be to reduce the heavy tariffs on Brazilian ethanol, which currently stands at 54 cents per gallon.

Some might be concerned that turning to foreign producers for ethanol could replace U.S. dependence on foreign oil with a new dependence on foreign sugar-based ethanol. However, it’s unlikely that increasing the global trade of ethanol could result in the manipulation of ethanol prices in a manner similar to OPEC’s manipulation of oil prices.  While there are less than two-dozen countries in the world capable of producing oil, over 100 countries commercially produce sugar cane, including the U.S.  The widespread nature of sugar production around the world makes it difficult for any single group of countries to set a world price for sugar-based ethanol, since this would increase incentives for other countries to increase sugar production elsewhere, which would in turn lower the price.

The single biggest factor keeping the price of sugar in the U.S. above global sugar prices is the high tariffs that have been set to protect the domestic sugar industry from foreign competition.  Were such tariffs to be removed, the U.S. could much more easily set up its own refineries to produce ethanol-based sugar using the same technological advances that were developed in Brazil.  Meanwhile, the U.S. could simultaneously seek to develop the infrastructure necessary to make other forms of renewable and alternative energy sources widely available, while expanding its domestic oil supply as a stopgap measure. The U.S. has far more to gain from working with countries like Brazil that have already heavily invested the time and resources for energy independence through renewable fuels, instead of trying in vain to instantly replicate their successes on its own.

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Adam Benz is Foreign Policy Digest's Regional Editor for The Americas.

DEVELOPMENTS

With the price of oil having more than quadrupled since 2004, governments are negotiating an increasing number of deals in oil-producing African states, now hotspots for foreign investments.  African industries have historically been overlooked as potential investments because of political and economic instability.  Yet, with African markets growing steadily, investors are now seeing the continent as an attractive opportunity to capitalize on emerging industries and markets.  Despite rampant poverty on the continent, especially in Sub-Saharan Africa, African investments in fact provide “the highest returns on foreign direct investment of any region in the world,” according to the World Bank.

Russian energy companies are at the forefront of this trend.  Already, Russian energy firms have spent billions of dollars investing in oil on the continent. For instance, Gazprom, a state-owned energy monopoly that supplies almost one-third of the European Union’s gas, signed an oil and gas exploration deal with Nigeria in September of this year. 

China, too, has made significant investments in African oil markets.  With an economy growing at an average rate of 9% per year, China “is intent on getting the resources needed to sustain its rapid growth,” reports the Council on Foreign Relations.  Africa now supplies one-third of China’s oil imports.  China has invested heavily in major oil producers such as Equatorial Guinea, Nigeria, Sudan, Angola and the Republic of Congo, as well as in lower-profile oil markets still untapped by the West, like Gabon. 

Governments are also negotiating investment treaties with African states to secure politically important energy partnerships.  During the first week of September, President Hugo Chavez of Venezuela traveled to South Africa for a two-day visit to negotiate a deal with PetroSA, the country’s state-owned oil company.  The deal, if finalized, will be a bilateral investment treaty partnership between Venezuela and PetroSA that permitting the South African company to acquire a Venezuelan oil-producing asset.

The surge of investment in African energy has tremendous economic implications for oil-producing African states, with the potential for job creation and improvements in the countries’ economic standing.  In a speech earlier this month, Libyan leader Colonel Muammar Gaddafi said incoming oil profits would directly benefit citizens––“Put it in your pockets."

BACKGROUND

While known oil reserves in Africa amount to only 9% of the world’s total ––as compared to 62% in the Middle East––experts speculate that Africa may house large oil deposits that are yet undiscovered.

Investment in African oil is now rapidly increasing, but international interest in African energy resources dates back decades.  For instance, Nigeria and Angola, the two largest oil-producing states in Africa, have had business partnerships with Western oil companies since the 1980s.  While Africa is the most recent hotspot for foreign oil investment, the pattern of investment follows earlier oil-fueled economic booms in South America and the Middle East.  Both regions continue to rely on petro-dollars to develop their industries and provide economic stability.

Saudi Arabia is currently the world’s largest oil exporter, exporting 8.525 million barrels per day, according to the U.S. Government’s Energy Information Administration (EIA).  Saudi Arabia, Kuwait, Iran, and the United Arab Emirates––all amongst the top ten leading exporters of oil in the world––represent the Middle East’s dominance over oil exporting markets. Yet African nations aren’t far behind, with Algeria and Nigeria listed as the world’s eighth and ninth largest oil exporters, respectively, according to the EIA.

While oil-rich countries like Nigeria, Algeria, and Libya expect long-term profitability from their oil industries, other African nations are threatened by diminishing reserves.  Angola has less than twenty years of remaining oil reserves, and has joined others like Namibia, Egypt, Ghana, Zambia, and Kenya in diversifying their energy industries by developing biofuels–– energy derived from dead biological matter such as sugar cane or corn.  Experts cite low land and labor costs as perfectly suited for the development of the biofuels industry in Africa. 

ANALYSIS

Foreign investments in African oil have the potential to enrich the economies of oil-producing states, yet the global appetite for African oil is creating potentially worrying foreign policy implications. For instance, European governments are exhibiting “rising amounts of panic … about what the Russians are doing” in Africa, said Jon Marks, editorial director of the Africa Energy newsletter.  European countries are worried about a growing Russian monopoly on oil supplies, as the EU already relies on Russia for nearly one-third of its oil imports.

At the same time, China’s relationship with Sudan has drawn particular scrutiny, including accusations that in return for oil, China supplies Sudan with weapons which are then used in Darfur. Some experts also raise concerns about a U.S.-China race for African oil and energy supplies.  Others, however, dispute that China’s energy investments are closely tied to its overall Africa policy.  

Energy policy has been one of the main issues in the U.S. presidential campaign, as both Senators McCain and Obama have put forward plans to wean America off foreign oil.  Senator Obama announced at the Democratic National Convention his plan to eliminate America’s dependence on foreign oil in the span of only ten years. Senator McCain likewise has spoken about “the great and urgent challenge,” proposing offshore drilling as a first step to energy independence. Senator McCain, like Senator Obama, plans to “support new production of America’s own oil and gas reserves, because “we can’t outsource the solution to America’s energy problem.”  While as early as 2002 the Bush administration expressed plans to further invest in African oil reserves, Senators McCain and Obama haven’t directly made explicit their policies on investing in African oil. 

With the price of crude oil having risen to almost $150 per barrel this summer, Senators McCain and Obama are heavily targeting biofuels as part of their energy and economic plans. Biofuels might become a less viable energy alternative for the candidates, as the diversion of crops from food to fuel has contributed to soaring food prices in Africa and around the world for crops like rice, wheat, and corn.  Earlier this year, U.N. Secretary General Ban Ki-Moon said that rising food prices, which are attributed in large part to the diversion of crops for biofuels, are "a worrisome situation and pose a threat to countries in Africa."  Both U.S. Presidential candidates––in particular Senator Obama, who supports government subsidies for corn producers to stimulate biofuel production––face pressure to modify their biofuels-centric energy policies.
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Cathy Fisher is Senior Editor of Foreign Policy Digest.