‘A dangerous new energy source?’ – published by The World Today

August 2008

By Daniel Litvin – A edited version of this article was originally published in The World Today, Chatham House’s monthly magazine – Click here to view

Flaring off political pressures

Political pressures and obstacles have placed out of bounds the exploitation of billions of barrels of oil across the world – for the time being at least.

There is a source of energy that may be our best hope of saving the world economy from further battering by high oil prices in coming years. This source holds more potential for meeting rising energy demand in the short term than, say, solar or wind power, which for the time being lack sufficient scale. On the other hand, the risks implicit in its rushed exploitation are enormous: even nuclear power seems as safe as, well, windmills by comparison. And worryingly, the race is already on to exploit this source, without sufficient consensus on the rules of the game.

The source in question is what might be called “politically-capped oil”: crude reserves which, while economically rational and technologically feasible to exploit, have so far been placed off limits for political reasons. The political motives for the grounding of this oil vary greatly in different parts of the world (which explains why this has yet to be properly understood as an overarching global phenomenon). But they tend to fall into one of five buckets.

The first is that the oil’s exploitation is deemed by governments or communities to be too environmentally sensitive (an example here is the oil under America’s arctic national wildlife refuge, or ANWR). The second is that the foreign capital or technology which would be needed to exploit it is deemed by host governments to be too politically risky or objectionable given domestic nationalist sentiment (an example here would be some of nationalist Mexico’s large deep-water oil reserves).

The third is that civil conflict and violence, frequently related to political disputes over the spending of existing oil revenues, make it physically impossible or too dangerous to exploit (example: some of Nigeria’s and also Iraq’s oil). The fourth is that the oil lies in disputed territory, where international political agreement would be needed to exploit it legally or without controversy (example: the oil reserves under the Arctic – albeit much of this would also be tricky to develop for economic and technological reasons). The fifth is that the oil lies in a country deemed a “rogue state” by the international community and hence foreign investment in its exploitation faces significant international opposition if not sanctions (example: Iran and Sudan).

The notion of “peak oil”, the theory that geological limits on global oil production are being or are about to be breached, has often been cited as an explanation for the dramatic increase in the oil price over the last few years (this peaked at $147 per barrel in July, before falling back to around $105 per barrel at the time of writing – a still very high level by historical standards). But geological limits immediately look less important when the phenomenon of “politically-capped oil” is considered, for the sheer volume of this oil is striking.

Waiting in the wings

The Energy Policy Research Foundation (EPRINC), a US-based industry-funded research group, recently estimated that between 2.5-4.5 million barrels a day of oil supplies are being lost as a result of various recent, politically-related restrictions on output across 11 oil-producing countries. That equates to around 3-6% of global oil production in 2007 – or enough to trigger further, even more dramatic, falls in the oil price. And that covers only a small fraction of “politically-capped oil”, a category which includes oil from many other countries and also oil first capped by governments before the period of the EPRINC analysis. Put another way, such oil, were it to be allowed to flow, would likely allow the world to avoid the problem of dangerously-high prices – or at least postpone it by several years.

Dangers in the pipeline?

There is no surprise that efforts are under way, on multiple fronts across the world and involving a variety of different sorts of controversies, to uncap some of this oil. Admittedly the rise of resource nationalism in countries such as Russia and Venezuela, and also growing civil conflict in Nigeria, has seen a recent trend in such nations towards more political restrictions on oil production not less; and international pressure continues to deter foreign investment in countries like Iran. But the high oil price is now often triggering an equivalent if not greater push in the other direction.

In America, for example, calls from politicians (and inevitably from oil companies) are now growing to allow exploitation of offshore oil which previously had been prohibited due to environmental concerns, as well as to allow drilling in the ANWR. Iraq’s government, prodded by America and other oil importing countries, has begun to invite foreign companies to help revive its oil industry, in spite of strong nationalist sentiment at home opposed to this. Various governments have been asserting overlapping territorial claims to the Arctic driven partly in the hope of exploiting its oil. Other governments have been trying to work out their territorial differences over other potential oil-rich patches – for example, the East China Sea where China and Japan are both seeking a slice of the action. And in rogue states such Sudan, oil firms which have left due to international pressure have simply been replaced by others (notably Asian firms) less concerned about damage to their reputation. Growing competition for access to oil is the key driver of such behaviour.

Not all such efforts to allow politically-capped oil to flow are unambiguously bad – and some may be positive (for example the revival of Iraq’s economy depends on attracting more investment into its oil industry). But often the oil in question has been capped at least partly for legitimate reasons – for example, genuine environmental risks involved in its exploitation, reasonable concerns that handing its development over to foreign companies would serve the national interest poorly, or deserved opprobrium of the rogue regime in question.

More worryingly the race to uncap it risks making some of the underlying problems worse. Rushed attempts to put a lid on local conflict in oil-rich lands without resolving the underlying grievances which drive it will likely store up problems for the future. Likewise aggressive assertion of competing territorial claims carries with it an obvious risk of all-out conflict.

What is needed are ways to allow to this sort of oil to flow by developing genuine political consensus on ways to exploit it, rather than forcing through quick, and ultimately unstable, political fixes. This is a complex topic, lacking in research and practical ideas (perhaps precisely because it has not previously been conceptualised as an overarching problem). Part of the solution clearly lies in more effective consensus-building measures at the local and national level. Also useful may be some sort of international mechanism or convention to accelerate a common understanding of what constitutes responsible oil exploitation. Certainly if that common understanding is not achieved, efforts to tap politically-capped oil could ignite or add fuel to tensions in a host of politically-explosive situations.

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