The windfalls have some important upsides for oil-producing nations and the world at large. Saudi Arabia’s oil revenues have surged from $60 billion in 2000 to an estimated $152 billion in 2007. Its budget has moved from deficits to a large surplus. Russia, effectively bankrupt in 1998, has used its vast oil and gas revenues to eliminate most foreign debt and build $434 billion in reserves. Both countries are diversifying beyond energy. A host of other nations, including many small African and Caspian Sea countries, are establishing sovereign-wealth funds to better manage their billions, injecting much-needed capital into markets in the midst of a credit crunch.
Yet even as oil has greased the wheels of global capitalism, it has hindered democracy. Governments with large oil receipts need less consent from the governed to stay in power. They can reward their friends and buy off their opposition, or pay to have it crushed. They discourage free markets and favor state enterprises. In countries like Nigeria and Azerbaijan, the result is repressive and corrupt political institutions and bloated bureaucracies sustained by oil money.
Certain producers, notably Russia, are asserting their influence through energy politics rather than military might, using their resource wealth to strong-arm neighbors and build new empires. All the producing countries now feel more confident and less dependent on the traditional powers. Roles are suddenly reversed. It is the energy importers who are now the supplicants. When President Hu Jintao of China left Washington in spring 2006, his destination was Nigeria. Likewise, the Japanese prime minister, Shinzo Abe, flew to Saudi Arabia after his recent U.S. visit.
These Chinese and Japanese leaders understand that global oil supplies are a looming challenge. The U.S. appetite for gasoline and surging Chinese oil and gas demand have proved surprisingly resistant to high prices. The world currently consumes about 83 million barrels a day, up from 71 million a decade ago, and will need ever more oil in the future.
National oil companies now control nearly 80 percent of worldwide reserves, leaving major Western multinationals with full access to only 6 percent. Some state companies, like Malaysia’s Petronas, are world-class and highly efficient, but many are simply bureaucracies in the oil business. One downside of today’s record prices is that ineffective state firms can satisfy the revenue demands of their political masters without investing to sustain production levels. In Iran and Venezuela, where high prices are concealing production declines, short-term political expenditures and subsidies are taking precedence over longer-term investment. Iran, with the world’s second largest combined oil and gas reserves, is an importer of natural gas and will depend on imported petroleum products within a few years.
Some have claimed that the world is running out of oil for geological reasons. It is more accurate to say that, given existing technology and political structures, it is in danger of running short of oil production capacity. Because many national oil companies are not investing to offset natural production declines, demand could outstrip supply. Without major energy-conservation efforts (not least in the United States), the impact will be enormous, with sharp price increases leading to a major economic contraction and dislocation. Governments would maneuver to secure scarce oil supplies, with potentially devastating geopolitical results.
Some environmental advocates might argue that such a crunch would finally create the political will needed to address the problem of global climate change. It seems more likely that it would divert politicians from long-term environmental concerns to the immediate energy crisis.
There is no question that the world has entered a less stable era. New actors, flush with money and ambition, are playing bigger if not always better roles. Energy security—defined as reliable supplies at reasonable cost obtained in an environmentally sustainable manner—is no longer assured. The old powers, notably the United States, must approach this new world with increased investment in alternative technologies, more creative partnerships with producing nations, heightened diplomatic skills and major efforts toward energy efficiency. If not, our security, energy and otherwise, will almost certainly be threatened.
