Yergin: US energy security lies in diversified supply

HOUSTON, Aug. 12 -- The US will focus more on Eurasia, West Africa, and Latin America to diversify its oil supply sources and bolster energy security in the face of increasing imports and rising Middle East tensions, contends Daniel Yergin.

Yergin, chairman of Cambridge Energy Research Associates, a Massachusetts-based, international think tank, made the comments in testimony before the US House Committee on International Relations earlier this summer.

"We see significant growth in world oil supplies over the rest of this decade-measured in terms of additions to capacity, something on the order of a 22% increase," Yergin testified. "Some of the most noteworthy growth will occur in Eurasia (Russia and the Caspian), West Africa, and Latin America. But the largest growth looks to be in the Middle East.

"The deepwater Gulf of Mexico also will be a major source of growth," he added, "offsetting declines elsewhere in the US. This growth in capacity will be required to meet rising demand from developing countries, led by China and India."

Although the US imported 36% of its oil 25 years ago, Yergin said, today, it's more than 50%, and energy security concerns have come to the forefront of US public policy again.

"For 30 years, 'energy independence' has been a recurrent cry," said Yergin. "Yet, during these years, (the US has) become more integrated into the world economy in many ways that have contributed to higher standards of living and higher employment.

"Oil, however, is a strategic economy. The issue is not whether ((the US)) should import oil, but, rather, how to avoid being in a position that makes (it) vulnerable to disruption. Unless (the US is) able to imagine some draconian regulations or a series of technological breakthroughs that are not now apparent, the practical question does not revolve around substantial reductions in imports, but rather around stabilizing them."

Key energy providers
Six countries, in the following order, provide 70% of US oil imports: Canada, Saudi Arabia, Mexico, Venezuela, Iraq, and Nigeria, CERA says. With the bulk of new incremental Middle East production expected to be exported to Asia, the US will need to secure other sources of the oil on which its economy depends. The most likely sources of future growth of world supplies outside the Middle East include:

* Russia. After years of frustration and disappointment, Western companies wanting to diversify their resources now view Russia as a better risk for significant investment. Based on what is known today, CERA sees strong oil growth coming from Russia and the Caspian-to 13.2 million b/d at the end of the decade from 9 million b/d today-a 50% increase.

* West Africa. On the cusp of becoming a leader in global oil production growth, West Africa's potential has been manifested in recent years by large oil discoveries off Angola, Equatorial Guinea, and Nigeria. CERA estimates that West African oil production capacity could increase to 6.8 million b/d in 2010 from 4.3 million b/d this year-a 60% increase-with West Africa providing one seventh of the global capacity growth over the period.

* Latin America. There is tremendous potential for new oil and gas supplies in several countries in this region, including Mexico, Venezuela, Brazil, Bolivia, Colombia, Ecuador, and Trinidad and Tobago. Capacity could increase by 3 million b/d by 2010. Venezuela alone has over 100 billion bbl of proved reserves, if the Orinoco extra-heavy crude oil reserves are considered. Latin America is an important future source of energy supply to the US, particularly when one considers its proximity, although investment concerns weigh heavily in many countries.

Based on current indications, CERA expects that Middle East oil supply capacity will grow by 7 million b/d during the same period.

Strategic principles
Yergin outlined eight key principles upon which energy security policy should be based:

1. Recognize that the US is part of a global oil market, a huge logistical system that moves 77 million b/d of oil around the world. US security resides in the stability of the overall market.

2. Winston Churchill's maxim of 90 years ago still holds true: "Safety and certainty in oil lie in variety and variety alone." Diversification of supplies is one of the key guarantors of security. This has been an important element of US policy since the 1970s.

3. Emergency internal stocks, such as the Strategic Petroleum Reserve, are a front-line defense against disruption. But they should not be devalued and undercut by turning them into market-management schemes that confuse temporary hikes with a serious disruption.

4. The oil market is much more flexible than it was in earlier decades. Intervention and controls can be most counter-productive, hindering the system from readjusting.

5. Pursue cooperative energy relations with other importing nations, whether they are industrial nations, rapidly growing oil importers such as China and India, or poor nations. These can be pursued on a multilateral basis, as with the International Energy Agency, or bilaterally.

6. Governments can allay panic that creates self-fulfilling prophecies. The US government can disseminate quality information and facilitate within the industry the exchange of information that makes more-rapid adjustment possible.

7. Most oil exporting nations are deeply interested in "security of demand"-stable commercial relations with their customers, whose purchases often provide a significant part of their national revenues. The US should maintain strong, consistent dialogues with exporting nations.

8. A healthy, technologically driven, domestic energy industry is part of energy security as well as a commitment to research and development and innovation across a broad spectrum that takes into account current and future environmental considerations.

In addition to these eight principles, Yergin outlined one final axiom for the committee. "The unexpected happens," Yergin quoted British Prime Minister Margaret Thatcher as saying. "You had better prepare for it".

"'Thatcher's Law' seems to me a very good principle-indeed, an essential one-when it comes to energy security," he said.