16. ENERGY QUESTION MAY SPELL END OF THE GOOD LIFE FOR THE WEST

BUSINESS VIEW: by David Montagu-Smith
Independent adviser on international energy issues.
The Times, London, UK, Tuesday, December 27, 2005

IN HIS 1939 book On the Marble Cliffs, the German soldier and scholar Ernst
Jünger showed how a comfortable, complacent society could sleep-walk into
catastrophe by refusing to read the signs of impending danger.

We may be nearing a Marble Cliffs moment of our own, not just in this
country, but all across the developed world, in terms of the energy outlook.

Since the Second World War, the economic and social progress of the planet,
for better and worse, has been heavily influenced by the policies and
cultural make-up of OECD nations. That progress, if such it be, has been
fuelled largely by supplies of oil and natural gas from parts of the world
over which, in one way or another, OECD members have held sway.

In this process, the main supply source, Opec oil-producing countries, have
with one or two aberrations maintained a moderate stance, with the result
that the cost of “raw” energy has not consistently sustained its real value.
A major reason for this has been the competitive force of non-Opec oil and
gas production.

This comfortable world, as we have known it, is coming to a crucial turning
point. And energy, specifically the cost and security of energy supply, lies
at the apex of this turning point.

The components of the challenge to be faced may be familiar. There are
environmental risks, specifically concerning climate change, and the costs
and technological developments required to address them. There is rampant
growth in new energy demand, from China and India in particular. There is
the fact of depleting OECD reserves of conventional oil and gas. And there
is our increasing reliance on natural gas for power generation. These
problems are being addressed by energy consumers, not least in this country,
in a parochial and superficial manner.

So, while some of the problems, such as Kyoto, have had much attention,
others, such as the long-term security of energy supply upon which our
prosperity has depended, have been neglected. Now, suddenly, new risks are
appearing on the horizon. There are new dangers that could alter our quality
of life over the next 20 years. They could put at risk the comfortable
social order we have created for ourselves, to which most of the rest of the
world has been conditioned to aspire.

A key factor in the changing balances of world energy is Russia, and the
ambitions of President Putin’s country to reassert its place on the world
stage by using its growing muscle as a future energy supplier to the markets
of Europe and the US to recover some of the ground and status lost after the
demise of the USSR. President Putin, perhaps tellingly, is reported to have
described the demise of the USSR as the 20th century’s “greatest
geopolitical disaster “.

So perhaps we should heed some distant storm warnings. Perhaps we should
worry when President Putin enlists support from a former German Chancellor,
moments after his retreat from politics, and only months after they have,
together, signed a treaty to build a gas pipeline under the Baltic, which
that ex-Chancellor will supervise. Perhaps we should worry when that
pipeline project will be led by an ex-boss of the East German Stasi, whom
Putin met when he himself was a KGB boss.

Perhaps we should be concerned when Putin attempts to recruit a senior US
presidential aide to one of the boards of Rosneft, the Russian oil company
so indecently manhandled back into state control. And when Gazprom threatens
to withhold gas supply from Ukraine – and, hence, indirectly from Europe –
after its electoral escape from the gerrymandering of Moscow’s acolytes. And
when Gazprom has declared its intention to control up to 10 per cent of the
gas supply to the US by 2015, as well as up to, if not more than, 30 per
cent of the European gas market.

Perhaps we should be concerned when Russia and China seem to be coming to
recognise the scale of opportunity that a strategic partnership can offer
them in terms of energy security and global influence? And when the US
Department of Energy forecasts that, by 2020, the annual shortfall in Opec
oil production, against global demand, will exceed the biggest-ever
production of Saudi Arabia, the traditional swing producer. And when we
expect Canadian gas exports to the US to dwindle and shortly cease because
of the need for energy for the processing of tar sands.

And perhaps we should worry when all these things are happening in such a
way that we need to recognise that our affluent living standards, which we
all take so for granted, may be under a greater risk now than they have ever
been.

What we believe to have been the definitive triumph of the Western
democratic way over the sterile misery of the Soviet system may be turning
out not to have been the victorious end of the Cold War after all, but just
one battle in an unending struggle for global power and influence.

The key weapon in the battle lines now being drawn is energy. Even if market
forces prevail in setting costs of oil and gas, it seems clear that having
so heavily depleted its own relatively low-cost hydrocarbon reserves, the
OECD will have no influence over the supply or over the very much higher
future costs of that supply.

There is much clamour from parochial vested interests in this country
concerned with renewable energy sources and pursuit of the subsidies that
are a pre-condition of their commercial viability. Environmentalists seem
oblivious to the impact their theories will have on the quality of life as
we know and need it. Meanwhile, European nuclear power groups are
negotiating for the UK power market to be tilted in their favour and
threaten to compromise the Government’s latest energy review.

Yet these other hugely important matters attract too little discussion, too
little debate. -30-

David Montagu-Smith, independent adviser, international energy issues.

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