Why Global Energy Diplomacy Matters
What is the U.S. State Department’s vision for a better future for global energy and the environment?
April 25, 2013
The world’s new energy geography and increased American self-sufficiency should not be seen in the United States — or abroad — as foreshadowing, or justifying, an American pullback from the rest of the world.
Energy shortages, price volatility or disruptions anywhere can threaten economic growth everywhere.
We want to work with participants in this new geography of energy — our traditional partners plus major emerging economies — to help vital goals.
The most prominent ones among them are to ensure stability and transparency in energy markets, the development of alternative fuels, freedom of navigation and good environmental practices.
The United States has seen — and will continue to see — global energy security, market efficiency, stability and cooperation to be in our economic, foreign policy and national security interests.
But the United States cannot successfully guarantee global energy security, efficiency and market stability on its own.
This is especially true today, with so many new or rapidly growing players, who account for ever-increasing amounts of the energy consumption and production.
On the consumption side, the IEA reports that nearly two-thirds of growth in global energy demand over the next 20 years will come from emerging economies in Asia.
China, in particular, is expected to use 68% more energy than the United States by 2035. Already, 75% of oil flowing from the Persian Gulf goes to Asia.
Increasingly, the Indo-Pacific Sea lanes will be the channels for moving energy east. One graphic indication of this comes from projections that oil and gas shipments through the Straits of Malacca will double over the next two decades.
As a result, many countries share an interest in keeping those lanes open and secure — and ensuring that disputes in the region are settled peacefully and based on international law.
On the production side, technical advancements upstream, new finds in places like Tanzania, Mozambique and the eastern Mediterranean, as well as the globalization of natural gas markets — driven by the rise in LNG trade — will also alter supply patterns and the direction and volume of trade.
As a result, a growing number of countries will have:
- A voice in the global energy dialogue;
- A stake in the security of important global shipping routes;
- An interest in market stability, efficiency and transparency; and
- A role in developing good ways of financing new energy infrastructure and technologies.
The decisions made by new and increasingly significant players — both importers and exporters — will have a profound impact on global energy markets.
For example, when it comes to natural gas markets, we all — Asia especially — can learn from the European experience.
Major changes in Europe in recent years have demonstrated that a greater diversity of supply choices, a wider range of pipeline and distribution systems, enhanced infrastructure, price liberalization as well as meaningful anti-monopoly laws and regulations have led to greater energy security and more efficient markets.
This has helped these markets overcome past rigidities, distortions and potential political leverage.
As Asian governments weigh their options, they find that their economies now have many competitive options.
These include pipeline gas from Eurasia and LNG imports from Australia and other parts of Asia, Qatar and North America to fulfill their growing demand for natural gas.
Of course, there is another layer of complexity that must urgently be addressed — the interaction between energy and the environment.
Global growth in energy demand in emerging economies has followed the path set by the United States and other industrialized economies in the course of their development. As countries develop, they consume more energy.
But the period of rapid growth for most OECD countries came at a time when the environment was for many an afterthought. The world today no longer has that option.
The threats of catastrophic climate change and permanent environmental degradation are real. For many emerging countries, the environmental impact is increasingly apparent within their borders.
Choking pollution threatens the health of their citizens — particularly children — and their peoples’ economic productivity as well as the quality of millions of lives.
Given the broad sweep of changes in the global energy equation, it is clear that we need a new vision, a new path forward. I see four opportunities.
The first opportunity is that all of our countries need to focus on producing greater amounts of energy from renewable sources, such as wind, solar, geothermal and hydro. We also need to continue developing nuclear power, which offers a source of electricity free of CO2 emissions.
Accelerating the development and deployment of clean energy technologies will require a renewed commitment to innovation.
Governments must, therefore, avoid mercantilist policies that hinder innovation. These detrimental policies include:
- Providing subsidies to local producers,
- Favoring indigenous over foreign companies,
- Forcing technology transfer as a condition of market access,
- Distorting regulatory standards, as well as
- Imposing restrictive trade barriers.
A new form of mercantilism has emerged in the energy and environmental sectors — often referred to as “green mercantilism.”
While attractive to some in the short-term, over the long-term, green mercantilism will discourage investments of time, money and talent for the development of new technologies.
These policies will reduce the pace of innovation, which is critical to revolutionize our energy sector and enable new technologies to be competitive, without requiring subsidies or other forms of protection.
The second opportunity I see is that the ongoing natural gas revolution presents an intermediate or bridge fuel opportunity.
The global landscape has changed markedly because of new shale technologies, as well as major conventional gas finds in Africa, the Mediterranean, Australia and other regions.
The United States has organized dialogues with a number of large emerging countries to discuss the development of their gas resources.
The State Department’s Unconventional Gas Technical Engagement Program, in particular, is helping countries develop their gas resources safely and reasonably.
Our engagement with foreign governments especially features private sector participation. Many of our companies have great experience in production techniques that can be deployed around the world.
It is important to note that our engagement in this area involves our regulators, who can work with foreign governments to promote good environmental practices.
Replacing other fuels — particularly coal — with natural gas can benefit both energy security and the environment. Nowhere is this truer than Asian countries, where power sectors are rapidly developing. Natural gas, however, is not a panacea.
The third opportunity I see is that, as we take advantage of dramatic new opportunities stemming from the global gas revolution, we cannot lose momentum in pursuing higher environmental standards.
This can be done with great effect. For instance, in the 1970s, the United States Congress passed the Clean Air Act. Owing to this legislation, the United States enjoys some of the cleanest air in the world today.
Some feared that that the economy would be weakened from clean air regulations. It was not.
National air quality standards for the emission of sulfur dioxide and nitrous oxides from power plants spurred an industry of environmental control technology that created large numbers of jobs and produced over $37 billion in exports in 2010.
The fourth opportunity I see is simply to use energy more efficiently. The energy intensity — which is a measure of energy use per dollar of GDP — of the U.S. economy is expected to decline by 42% between 2010 and 2035.
Companies are striving for efficiency not simply to advance good environmental practices, but also because it is good business. Being more efficient makes them more competitive.
Some governments, unfortunately, have gone down a path of providing large fossil-fuel subsidies for their citizens.
Although intended to support poor citizens, energy subsidies are, by and large, counter-productive. These subsidies impose substantial fiscal, economic and environmental costs.
Several studies have shown that fossil-fuel subsidies benefit high-income households more than the poor. Removing or reducing energy subsidies would incentivize energy efficiency and lower energy consumption.
But we must also recognize that doing this is far from easy.
For some low-income countries, crafting a more effective social safety net that benefits low-income households would ease the difficult and politically fraught task of reducing or eliminating fuel subsidies.
Our own political, economic, environmental and national security interests depend on robust energy diplomacy and strong partnerships to seize the opportunities and address the challenges we all face.
That is why the State Department will continue to work across the globe in partnership with others to help countries develop and bolster a variety of new supplies and suppliers, find opportunities to manage the growing global thirst for energy, and ensure secure and efficient means of energy transport and transmission, as well as mitigate environmental damage and climate change.
America's increased energy self-sufficiency should not be seen as foreshadowing, or justifying, an American pullback from the rest of the world.
The United States cannot successfully guarantee global energy security, efficiency and market stability on its own.
As we take advantage of dramatic new opportunities stemming from the global gas revolution, we cannot lose momentum in pursuing higher environmental standards.
When it comes to natural gas markets, we all — Asia especially — can learn from the European experience.
"Green mercantilism" will discourage investments of time, money and talent for the development of new technologies.
Robert D. Hormats
Vice Chairman, Kissinger Associates Robert D. Hormats is Vice Chairman of Kissinger Associates. He served as Under Secretary Under Secretary for Economic Growth, Energy and the Environment at the U.S. State Department from 2009 to mid-2013. Prior to that, he was Vice Chairman, Goldman Sachs (International) and Managing Director of Goldman, Sachs & Co. Mr. […]