Tuesday, October 6, 2009

The Impending Oil Shock

By Nader Elhefnawy

This is an electronic version of an article published in Survival 50.2 (April 2008), pp. 37-66. Survival is available online at informaworldTM.

Abrupt rises in the price of oil in recent years have helped revive concern about the long-term viability of a fossil-fuel-based economy. Many business writers have seen these rises as simply compensating for the oil glut of the 1990s, or due to specific, localised, temporary difficulties such as Hurricane Katrina, the war in Iraq or unrest in Nigeria. More pessimistic analysts, however, argue that world oil production is peaking, and will soon start dropping, even as the demand for energy continues to soar.1 That means that the beginning of the end of the oil age may be just around the corner, and the only question is whether the landing will be soft or hard-whether we will find ourselves in a truly post-industrial world, where new technology is effectively substituted for depleted natural resources, or in the midst of a Malthusian catastrophe and a new dark age.2

The coming energy crunch?
It is frequently reported that the world's proven reserves of liquid petroleum are on the order of a trillion barrels, but what exactly this means is rarely explained. Oil reserves are classed as 'possible,' 'probable' or 'proven,' the latter being the categorisation most often discussed. 'Proven' means there is a 90% chance of it being economically feasible to recover a given quantity of oil. (By contrast, there is a 50% chance with a 'probable' reserve, and a 10% chance with a 'possible' one.) Of course, determining what is 'economically feasible' means making assumptions about the price of oil and the technology available to extract it. Even if not a single additional barrel is found, a higher price for the commodity, by justifying more expensive recovery techniques, can increase a 'proven' reserve, as can improvements in technology. It is frequently noted, for instance, that the percentage of oil recovered from deposits has risen from 22% to 35% since 1980 because of such improvements.3

According to the US Geological Survey, it may become feasible to extract another 700 billion barrels from known supplies, and indeed optimists anticipate that these will meet the 'proven' standard in just a 'few years.'4 The Survey also calculated that another 1tr barrels await discovery and exploitation.

When added to the familiar trillion-barrel figure for proven reserves, the probable and possible reserves bring the total up to 3tr barrels of recoverable liquid oil.5 Translating as it does to a 100-year supply at current consumption rates, this would make any crisis appear far off.6 Nonetheless, oil consumption is expected to grow at a rate of 1–2% every year for the foreseeable future. A 1.5% rate of growth would double consumption in 50 years, and by itself reduce current estimates to a 70-year reserve.

Perhaps more importantly, the process of calculating the amount of oil that might be recoverable from a deposit is neither exact nor transparent, so that the 3tr-barrel estimate cannot be blithely accepted.7 There is plenty of room for over-optimism, wishful thinking and outright lying-a 50% 'probable' reserve easily turning into a proven one on paper. Close examination of 'proven' reserve estimates from year to year often shows suspicious changes, or a suspicious lack of change. Reserves commonly stay the same for years or even decades despite continuing production and an absence of obvious compensating changes.8 As many as 300 of the estimated 700bn barrels reported by OPEC countries as proven may be suspect.9

Of course, vast unproven (and unlocated) supplies could more than compensate for such shortfalls, but again there are profound uncertainties. By definition, 'probable' and 'possible' supplies are an even less certain matter than 'proven' ones. Additionally, even if the world's untapped reserves are as large as some observers claim, this is no guarantee that they will conveniently be found when needed, or even at all. It is certainly the case that newer supplies, such as the South Atlantic fields off Brazil and Angola, are being located and exploited.10 However, the rate at which new supplies are located started falling in the 1960s, and overall consumption has outpaced the rate at which oil has been discovered since the 1980s, so that today such discoveries replace only a quarter of what is used up each year.11 It should also be remembered that it takes at least ten years to get production going on an economic scale at a site after finding oil, so there is a considerable lag between discovery and production.12

Many observers point out that energy companies have invested comparatively little in locating new supplies or expanding production since the 1980s-allowing their spare capacity to slip from 15% of the market in 1986 to a mere 2–3% in 2005.13 Until recently, this has usually been attributed to low oil prices, and taken as proof of justified confidence in the future. Additionally, given the glut of the 1990s and their high profits at present, both private and state-owned companies have little incentive to dramatically enlarge the oil supply through such investments.

There are alternative explanations. Considering the tendency of oil companies to exaggerate their reserves, it may simply be that the industry is deterred by diminishing returns on its investment.14 Not only is it taking more effort to get oil out of the ground, but there would seem to be relatively few places left to explore (as indicated by the emphasis on new technology and the importance of offshore and other difficult-to-reach supplies).15 Consequently, even if the present scarcity of oil is temporary, oil producers will not automatically and smoothly ramp up output when supplies tighten, even should they wish to-precisely the issue addressed by the controversial 'peak oil' argument.

Peak oil?
The peak oil theory, first propounded by Marion King Hubbert in 1956, asserts that oil production from a particular territory, whether a field, a country or the whole planet, follows a bell-shaped curve, rising exponentially early on, hitting a peak and then declining terminally. This is because production in an oil field does not stay constant until the moment the wells tap out. All other things being equal, production in a well rises to a maximum, plateaus, then starts tapering back down to zero because of dropping field-pressure after roughly half the oil has been extracted.

All other things are rarely equal, however. Extraction rates can be raised with more effort, or increases made practical by technological improvements or higher prices, which has caused some observers to characterise Hubbert's theory as overly simplistic. Another problem with peak prediction is that it must be based on the size of an oil reserve, calculations of which are highly uncertain. Whether a prediction assumes the trillion-barrel 'proven' figure to be grossly exaggerated or unduly pessimistic makes a great deal of difference.16

Nonetheless, Hubbert's work has received widespread attention because he accurately predicted that US oil production would peak between 1965 and 1970 (it actually peaked in 1971). Other Hubbert predictions have proved less accurate (for instance, that the global peak would come in the 1990s).17 Still, consistent with his projections, the world's oil production is today concentrated in mature, ageing fields from which the extraction of additional supplies is increasingly costly in terms of money and energy.18 Even Saudi Arabia increasingly depends on water injection (pumping seawater into oil deposits to keep field-pressure high) and mechanical aids to induce artificial lift.19 Consequently, a shrinking number of fields will produce a dwindling amount of oil as they each peak in their turn, causing the world's total production to drop toward a point at which it will become too expensive to extract any more.20

Even inside the typical parameters of this argument there are large unknowns, which quickly become apparent when one crunches the numbers. While production might peak at any time, the peak is usually predicted for some time between 2010 and 2020.21 Afterward, oil production is projected to drop at a rate of 2–6% a year.22 Such a sharp drop would necessitate massive adjustment. The most obvious is to produce oil in ways other than pumping liquid oil out of the ground, so 'unconventional' sources of oil such as sands, natural gas and coal have attracted great interest in recent years.

Unconventional oil-a closer look
It is commonly estimated that the world possesses a reserve of 6tr barrels of 'heavy' oil, already being mined in the Canadian province of Alberta and in Venezuela's Orinoco river valley.23 Still more might also be extracted from natural gas and especially coal, a tonne of which has long been held by the proponents of such processes to be capable of yielding four barrels.24 Yet, it has to be remembered that extracting a barrel of oil from tar sands or coal tends to be quite energy intensive, often requiring additional fossil fuels, so that such production is actually constrained by the scarcity and price of those fuels. The current process of mining and upgrading heavy oil, for instance, uses very large quantities of natural gas.25 As of January 2002 the world's proven reserves of natural gas came to 175tr cubic metres. With the annual consumption rate sitting at 2.675tr cubic metres, this means there is a 65-year supply at current rates of use.26 The world's estimated trillion tonnes of recoverable coal is thought likely to last longer, for 180 years at current levels of usage.27

Even if these reserve estimates are taken at face value (and they may well be too conservative or too optimistic), linear projections are just as deceptive with gas and coal as they are with oil. Their share of the world's energy portfolio has not only risen steadily in recent decades, but is expected to continue rising for the foreseeable future, especially in the United States, where scores of coal-fired power plants are planned, and in China, which is rapidly expanding its own coal-based electrical production.28 One US Department of Energy projection has worldwide coal use doubling by 2030.29 Of course, the extraction of significant amounts of oil from coal would only accelerate this rise in consumption-and it should be remembered that the conversion of coal to oil is a relatively inefficient use of coal's energy content. Additionally, while the engineering problems involved in the extraction of gas and coal differ from those of oil recovery, many geologists also expect their production to 'peak,' perhaps as early as the 2030s in the case of coal, so that the supply will become considerably more difficult to recover at a given price or level of technological sophistication.30 Consequently, while the total supply of coal and gas may be more plentiful than oil, these other fossil fuels may not do much to ameliorate a dwindling oil supply.

Another limitation of unconventional oil sources is that none of them has ever been exploited on a scale remotely comparable to that of liquid oil, nor are they likely to be soon. The US Energy Information Administration estimates unconventional supplies will produce 11 million barrels a day by 2025, a tenth of likely consumption (100–125mn barrels a day)-and possibly too little to compensate for the shortfall in other oil production.31 (The administration estimates that the much-hyped Canadian oil sands will raise their production by just 2.5mn barrels a day in the next 25 years.32)

A benign scenario in which continued high levels of oil production, bolstered by supplies of unconventional oil, keep the oil economy financially (though perhaps not environmentally) viable through the twenty-second century is conceivable, but is not the most likely scenario. It seems more probable that exaggerated reserves (proven and unproven), a declining rate of oil discovery and peaking production in mature fields will combine to tighten supplies, perhaps more rapidly than can be fully compensated for by unconventional oil supplies. The timing and severity of that tightening is admittedly open to question. Belated discoveries or technological improvements that increase output, or a general economic downturn that suppresses the rise in oil consumption, are not out of the question. Nonetheless, the evidence for a significant, prolonged and continuing contraction in production (or alternatively, of significantly raised prices) beginning by the 2020s is considerable.

The security dimension
In the meantime, the scarcity of oil will have profound implications at the international level, particularly in the realm of security. Five aspects of this problem warrant special attention. The first is how the position of energy exporters will change. The second is the expected impact on importers, particularly the major industrial nations. The third is the extreme case of state failure, when states simply fail to secure adequate energy resources to remain functional. The fourth is the heightened risk of armed conflict over energy resources. The fifth is the likelihood of an abruptly and dramatically widened use of nuclear energy, and the worsening of its associated problems.

Oil exporters
The scarcity of oil will work to the advantage of some states, and the disadvantage of others. Major oil exporters will enjoy higher revenues and greater political leverage, particularly as their number shrinks, reversing the diversification of the world's oil suppliers under way since the 1970s. The leverage of states like Saudi Arabia, Iraq and Iran may grow accordingly, and with them, that of OPEC (though less than may be imagined, if the reports of exaggerated supplies there are true). Outside the Middle East, Venezuela and Russia are both looming larger on the international stage because of their enlarged revenues from oil and gas exports.

However, this influence should not be exaggerated. A rapidly rising population and increasing production difficulties mean there will be no return to 1970s-style prosperity for Saudi Arabia, even were its profile as an oil producer to continue rising. Similarly, Russia's status as a 'natural gas superpower' is a very slender foundation for its ambitions, or even for preventing the continuing erosion of its power base.33 There are also consequences to using the 'oil weapon' against buyers, not least of these the forgoing of income from oil sales. This was not a major problem for the wealthy, industrialised United States when it refused to sell oil to Japan before the Second World War, or when it cut oil sales to the United Kingdom and France during the 1956 Suez crisis, but today, the potential economic cost of such a move is much greater for countries like Russia and Saudi Arabia which are so dependent on oil sales for foreign revenue. It should also be made clear that any gains in influence enjoyed by oil-exporting nations in an oil-scarce world would be temporary, lasting only as long as these states remained exporters, which might not be very long.34 (It is commonly estimated that Iran's profile as an oil exporter will suffer badly during the second half of the next decade, for instance.35) The contraction of supplies at the global level is inseparable from the contraction of supplies in these states. These states are also voracious oil consumers, not only because they are developing, but also because their large oil supplies permit governments to subsidise domestic use, fostering inefficiency.36 This will constrain their exports long before they exhaust their oil supplies.

Moreover, it is unlikely that a period of higher revenue from oil will provide a launch pad for more permanent economic power, given the poor record of resource-exporting countries.37 Philippe Le Billon, among other experts, has identified a 'clear pattern of economic underperformance and governance failure among resource dependent countries'-the so-called 'resource curse.'38 Rents from this revenue stream raise the exchange rate of their currency sufficiently to undermine the competitiveness of other sectors; and discourage economic diversification away from a single commodity subject to dramatic market fluctuations.39 They also tend to be at the discretionary control of elites, fostering not only corruption, but rent-seeking by various interest groups, and a tendency on the part of policymakers to mollify disaffection with that revenue rather than seek more fundamental solutions to problems.40 Indeed, corruption and overdependence on a single resource typically result in the 'overextraction of rents from the resource sector,' at the expense of needed maintenance.41

Oil exporters have tended to perform especially poorly in this regard, their revenues typically providing elites with the means to placate domestic interest groups, and fortunes that are invested and secured abroad, as in the case of Saudi Arabia.42 The result has often been the frustration of hopes for development rather than their realisation, and it may be expected that such tendencies will be exacerbated by higher revenues.

Despite these caveats, the greater influence oil exporters will enjoy will be very real, and oil exporters may take radical action if they see their vital national interests as being at stake. Indeed, the most likely scenario for an attempt by Iran to disrupt the flow of oil from the Persian Gulf may be the event of a conflict with the United States over a different issue (such as Iran's nuclear programme). It also has to be remembered that, at least in the short term, oil consumption is relatively inelastic, and where consumer buying patterns are concerned, the tendency has been to revert to previous behaviour as soon as the crisis of the moment is over, as has been the case in the United States since the 1980s.43 Moreover, even if wealthy states can endure price shocks, poorer countries will remain susceptible, as the recent history of Russia using its ability to supply cheap oil and gas as an instrument of power over former Soviet republics such as Ukraine, and more recently Georgia, demonstrates.44

There are passive as well as active ways to manipulate prices, as in the case of countries that refuse to enlarge their production capacity in line with world demand (as many experts consider to be the case with Saudi Arabia).45 Moreover, the manipulation of supply and prices need not be part of an overt policy. An oil producer interested in following such a strategy can always conceal such tinkering behind 'market' decisions, or attribute deliberate disruptions to other causes, an instrument Saudi Arabia has notably been thought to have wielded several times in recent decades.

Oil importers
While higher oil prices will mean increased cash flow to oil exporters, they simultaneously pose an increasing risk of economic stagnation to oil importers, whether as a result of a natural mismatch between supply and demand, or deliberate manipulations on the part of oil producers. Those importers that consume energy most efficiently, derive more of what energy they do use from alternatives to fossil fuels, and run the most favourable trade balances, will be least affected. It is commonly asserted that, among the major industrial nations, Japan and Western Europe are much more efficient energy users than the United States, and the available statistics bear this out. Adjusting for Purchasing Power Parity, the United States uses 30% more energy than France, 40% more than Japan and 50% more than the United Kingdom to produce an equivalent unit of GDP.46

That Japan and Western Europe are more energy efficient than the United States is further reflected in disparities in GDP per barrel of oil consumption. The United States consumes one barrel of oil for every $1,750 of GDP, compared with $2,000 for Japan, $2,400 for France, $2,500 for Germany and $2,900 for the United Kingdom.47 The use of natural gas and coal skews the figures, with higher consumption of these resources offsetting oil use, but most of these nations are markedly more efficient users of fossil fuels across the board.48 If anything, looking only at oil consumption understates the degree to which some of these other nations have reduced their overall fossil-fuel dependence. Most notable is France, which uses not only a third less oil, but one-half as much natural gas and one-ninth as much coal as the United States for each unit of output.49

Just as productivity per man-hour is now a key economic indicator, in the near future productivity per Btu or barrel of oil consumed will likewise be a key index of a nation's economic competitiveness, and this bodes ill for the US economy relative to other industrial powers.50 The superior energy efficiency of Germany and Japan is particularly striking given that a higher percentage of their GDP derives from energy-intensive manufacturing, where American (and British) energy savings can be partly correlated with their 'lighter' service economies.51 Additionally, where the United States runs a massive trade deficit, expanded by the price of its growing oil imports, Japan, Germany and France routinely run trade surpluses, making energy imports a smaller burden on their economies.52

Energy-efficient states will also have an easier time transitioning to alternatives, and here again the United States is in an unenviable position. Even were America not already so far behind in this area, it faces two special difficulties that European and Asian nations do not. The first is that the 'culture of oil' has much deeper roots in the national infrastructure and culture of the United States (for example in urban design and the status of public transport), which would force it to make more strenuous efforts just to keep up.53

The second difficulty, the exceptional strength of the oil lobby in the United States, reinforces this. It was largely because of oil-lobby pressure in the early 1980s that the US Federal Government abandoned tax credits and regulations aimed at fostering alternative energy sources, measures intended to create a 'free market' in energy.54 Abandoning these measures tilted the market in favour of more established sources, not least because coal, oil, gas and nuclear energy attained their market position because of a long history of government subsidy. Given the complexity of the issue and that many forms of government assistance are indirect, such as favourable terms on leases of government land to oil drillers, estimates of such support vary wildly.55 Nevertheless, the figure easily ran into several hundred billion federal dollars during the last century-investments never made in renewable energy.56 This remained the case even after the 1973 embargo, the federal government spending six times as much on researching energy production from fossil fuels and nuclear energy as on renewables between 1972 and 1995.57 Such support of oil is actually increasing, at least when the 'security subsidy' of military protection for energy production and transport is taken into account.58

As a result of these two factors, the 'US alternative energy industry was not only left to sink or swim among more mature competition, but was put at a disadvantage and withered,' while the 'oil, gas and nuclear lobbies received the lion's share of government support.'59 To give one example, the US share of the world's installed wind-energy capacity fell from 92% in 1988 to a meagre 35% by 1995, with American energy production from wind actually registering negative growth for several years during the 1990s.60 While growth since 1999 has been rapid, as of 2005 the US share of world capacity was still a mere 15%, behind Spain and Germany, the latter country producing twice as much electricity from wind as did the United States.61 Not surprisingly, wind energy's contribution to American electricity production remains modest, well under 1%-compared with 6% for Germany and over 20% for Denmark.62

While the situation may yet change (the process of transitioning away from fossil fuels has been initiated, but remains in its early stages), the United States will embark on any effort to reduce its fossil-fuel dependency from a position of significant disadvantage relative to other industrialised countries. Indeed, the United States could ultimately lose its position as a world power: political commentator Kevin Phillips has shown that changes in the energy base of a given historical period have coincided with the rise and fall of great powers.63 Thus, just as the UK's position declined along with the age of coal and steam it pioneered, so too could the United States decline as oil's era passes. While the idea that a German-led European Union and Japan might eclipse the United States economically is no longer taken seriously, such predictions may yet find some validation in these trends.64

That leaves the question of China and India, both of which enjoy economic influence that is increasingly comparable to the major industrial nations. China's overall energy efficiency is in fact roughly equal to that of the United States, and since 2002 has actually been slipping after nearly two decades of improvement.65 China is also a particularly voracious coal consumer, annually using twice what the US does in absolute terms.66 India is more energy efficient-its economic growth has been both slower and less driven by energy-intensive manufacturing than China's.67

Additionally, the sheer size of both countries, their rapid GDP growth and the fact that the developed portions of their economies remain small relative to the whole (half or more of the workforce in both countries remains engaged in agriculture), means that very large absolute increases in energy consumption are nearly inevitable.68 Already, China and India are the world's second- and fourth-largest oil users, respectively, and they are still building their energy bases. India is today one of the world's largest investors in wind energy, in fourth place between the United States and Denmark in 2005, but even its fossil-fuel use is expanding dramatically.69 China, moreover, appears set on a policy of expanded oil and gas use, a course that could prove increasingly problematic.70

State failure
Some states, particularly in the underdeveloped world, may not even be able to obtain sufficient energy resources to keep their economies functioning. Less-developed nations differ widely in the energy-intensiveness of their economies as well, but given the relatively low resource productivity of many; their obsolete, poorly maintained or otherwise inadequate infrastructure; and their obligation to pay for high-priced oil in hard currency; low-income oil importers will be in an especially poor position. In contrast to developed states enjoying more developed institutions and better access to capital and technology, less-developed nations have fewer of the resources needed to adapt to new circumstances, and any price shock would weaken such resources as they do have.71 Indeed, with adequate supplies of energy priced out of the reach of consumers, businesses and government, basic services might fail and states cease to be viable, even as developed nations continue to get by.

Any price shock would come in an environment already favouring state failure: recent years have seen stagnating growth in Latin America and Africa; the removal of a great deal of foreign support for weak governments (a process that started with the Cold War's end); and continued population growth in the poorest regions, putting pressure on infrastructure and resource bases. Many of these problems will get worse rather than better, particularly the relationship between population size and natural resources such as water and arable land. The salinated and damaged farmland on which a third of the world's crops are presently grown is a case in point.72 Aside from the expensive repairs such lands require, drip-irrigation and other methods needed to keep them productive are much more energy intensive than current practices. Not having access to the required energy may mean disaster.

Moreover, there will be spillover effects, such as refugee flows and the emergence of havens for terrorism and organised crime, as in Afghanistan and Somalia. There is also the danger that where one state fails, another may move in, either formally or informally. These interventions may be motivated by a sense of threat (guerrillas using the territory of failed states as a base of refuge), or the sighting of an opportunity to grab territory and resources-both of which were factors in the numerous invasions of the Democratic Republic of the Congo by its neighbours since the mid 1990s.73

The heightened risk of state failure will drive inreasingly desperate efforts to avoid it, especially given the lower efficacy of market-driven solutions in impoverished countries.74 Weak states may make 'neo-feudal' arrangements with sub-state actors like warlords, private militias and private corporations to shore up their positions. Alternatively, they may become more centralised and controlling, even totalitarian, and other, stronger nations may feel compelled to prop them up, despite the unsavoury character of their regimes.75

There may also be an increased demand for peacekeeping missions, demand that will likely overwhelm the ability of the major military powers to deliver; indeed, they have already been overwhelmed.76 The problem could become still more severe, not only because of more numerous crises, but because the lopsided conventional wars the major powers are most likely to fight require relatively few 'boots on the ground,' while nation-building in the ever more populous and urbanised developing world requires larger numbers.

Smaller countries are not the only ones at risk. The failure of large but economically fragile states on the model of the Soviet collapse is conceivable, and even more problematic at the global level, given that their size compounds their problems, making them more difficult to bail out or prop up, and introducing problems that are not a consideration with smaller states, such as the proliferation of sophisticated weaponry. The moment before a large nation collapses is especially fraught with peril.77 The Soviet Union made surprisingly little effort to resist dissolution in 1991, but there is no certainty that the next great power to go this way will not flail about dangerously prior to collapse. Great-power conflict is not out of the question; it may even be the most likely cause of conflict in the future, particularly if crises bring radical ideologies to the fore.78

Resource wars
Resources have historically been a factor motivating and fueling armed conflicts. According to a study by Paul Collier, 'a country that is heavily dependent upon primary commodity exports, with a quarter of its national income coming from them, has a risk of conflict four times greater than one without primary commodity exports.'79 This connection may be clearest in the case of oil, which is not just 'another natural resource,' particularly where the onset of civil wars is concerned.80 More than other resources, the presence of oil seems to increase the danger of harsh 'preemptive repression' against insurgencies by central governments, as in Darfur; of other states interceding in internal conflicts, such as providing support for a separatist movement in an oil-rich state; and of secessionists prolonging conflicts by selling off future exploitation rights.81

Explanations include the developmental problems common to resource-dependent countries such as poor government, corruption, poverty and high levels of inequality. High oil prices can exacerbate these problems by enabling failing states to stave off needed reforms, and increasing the attractiveness of the resource to rent-seekers, externally and internally. Dormant border disputes and secessionist movements could be reactivated as oil revenue becomes more attractive in places outside the Middle East, such as Latin America and sub-Saharan Africa. Where states have been thoroughly 'privatised,' as by warlords, criminal syndicates or state leaders with links to multinational corporations, this risk is especially high.82 A global economic crisis of the kind made likely by pinched oil supplies (particularly in less-developed regions) may also create openings for radical groups.

Such problems affect not just oil-producing nations, but key states in the staggeringly complex worldwide energy distribution system. Besides the risk to overland pipelines, especially problematic in Central Asia, state collapse tends to translate into maritime insecurity as well, as with the intensified (although so far comparatively minor) pirate activity off the coast of Somalia in recent years.83 External powers routinely embroil themselves in the domestic affairs of states key to the production and transport of oil, exposing themselves to all the hazards such intervention can entail. For example, supporting repressive governments can provoke resentment among the local population, which may manifest itself in terrorist acts (as in Saudi Arabia). Overthrow of a client government can mean inter-state conflict, as with the US and Iran since the 1979 revolution. Another risk is that major powers might find themselves on opposite sides of an internal conflict, as in Georgia, the territory of which is crossed by a key pipeline for oil from the Caspian Sea basin. There, a US-backed government battles Russian-backed separatists in Abkhazia and South Ossetia-a conflict some experts have identified as resembling a Cold War proxy war.84 Even private companies, as they seek to develop resources in ever more unstable areas, may be implicated in local conflicts. Oil companies have run up large private-security bills in recent years, and oil corporations were among the earliest clients of private military corporations, as in Angola.

The formation of new international alliances can also be a driver of conflict as large states pursue energy security. In Central Asia, Russia and China actively seek to counter US influence through bilateral military agreements and with the formation of regional blocs such as the Shanghai Cooperation Organisation and the Collective Security Treaty Organisation.85 Outside the Caspian Sea basin China is actively securing access to oil through relationships with Iran and Sudan, and through the ongoing build-up of its naval capabilities.

The problem of interstate conflict over oil may be exacerbated as an unintended consequence of some solutions to the world's energy problems. For example, new technologies that permit cost-effective drilling for oil in deeper waters could create new flashpoints. Cheaper deep-water drilling, for instance, would make the oil under the contested South China Sea a more valuable prize.86 It might be hoped that deep-water oil will be less likely to cause conflicts because the facilities and workers are relatively difficult for disgruntled local populations to reach. While this may make the facilities less accessible, however, offshore oil still figures into international conflicts because of territorial sea and Exclusive Economic Zone claims. (Timor Leste's claims to rich offshore oil fields were a factor in Indonesia's attempts to control that country.) The development of alternative energy technologies may raise the value of particular natural resources–such as platinum, which can be used as a catalyst in hydrogen fuel cells-with similar results.

The nuclear threat
Expansion of nuclear power as an alternative energy source is especially likely to compound international security problems. Oil shortages, or the prospect of them, are already putting pressure on states to follow the path France took in the 1970s and invest heavily in nuclear power for their electric grids.

There are currently 443 nuclear reactors operating worldwide, which as of 2004 produced 2,619bn kilowatt-hours of electricity every year.87 This amounts to roughly 17% of global electricity consumption. France, by contrast, gets 77% of its electricity this way. Were the entire world to follow the same path, this would mean a nearly fivefold increase in output, and perhaps 2,000 reactors online. From a technical standpoint, this would seem a reasonable way of reducing the world economy's oil dependence, and many analysts are advocating exactly this path.88

Nonetheless, a global rush to build another 1,600 (or more) atomic reactors is no cause for comfort. While nuclear-power advocates are confident that properly built, operated and maintained reactors are safe, there is no assurance that the reactors providing these new energy supplies will be any of these. A rushed enlargement of the number of working nuclear reactors in poorer, less-developed nations would be extremely dangerous. A repeat of the 1986 Chernobyl accident cannot be ruled out, and given the threat that such an incident poses to neighbouring states, the political wrangling over reactor construction programmes can be expected to multiply. Controversies like the one over Cuba's Juragua nuclear power plant could well become routine.89 The safe storage of spent nuclear fuel, given the long-term radioactivity of its waste products, is also a problem unresolved after more than five decades of experience, and underlies the controversy in the United States over the Yucca Mountain Repository.90

The burden on the surveillance mechanisms charged with protecting the non-proliferation regime will also grow, as trade in nuclear technology expands and the list of installations needing monitoring lengthens. This will heighten the risk of nuclear proliferation, though it is difficult to say by how much, given uncertainties about, for instance, the types of nuclear technology that energy purchasers will opt for. Of most concern are fast-breeder reactors, which are so called because they produce more fissile material than they consume by converting non-fissile uranium isotopes into fissile plutonium. In the 1970s this feature raised the possibility of a 'plutonium economy' in which the world economy would depend on plutonium-fueled reactors for its electricity.91 Higher-than-expected costs and surprisingly low uranium prices diminished the attractiveness of this path. However, this model is being actively pursued in several countries, including China, India and Japan, and changes in uranium prices (already rising) or the technological state of the art may bring back the concept on a broader scale.92

Increased production of fissile material by itself does not necessarily mean more nuclear states. The non-proliferation regime works largely because potential nuclear-weapons states commonly calculate that the weapons would do little to improve their security position. In future, however, the increased use of nuclear power could coincide with generally greater insecurity, altering those calculations. In particular, the nuclearisation of a single state can produce a chain reaction across its region in which other countries arm themselves, especially as it becomes easier to do so. The possibility that North Korea's nuclearisation may lead South Korea, Japan or even Taiwan to acquire nuclear weapons of their own is frequently raised. In the Middle East there have been signs that Saudi Arabia is reviewing its nuclear option, and a nuclear-armed Iran would be a strong spur to Saudi nuclearisation.93

Additionally, even if the risks of nuclear accidents, and of more states with nuclear-weapons programmes, were ameliorated, there would still be more facilities vulnerable to terrorist attack. It should be noted that it would be extremely difficult for terrorists to attack a reactor so as to produce a large-scale release of radiation; in theory even an 11 September-style attack with a hijacked airliner would be insufficient, at least in the case of US reactors. Nonetheless, there would be more targets, and an attack on a reactor can have effects far outside the targeted country, both from the radiation release, and the political and economic consequences that could follow. There would also be a larger stock of fissile material susceptible to theft, frequently in countries unable to bear the cost of securing it.

Continued.

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