TFR 17 – Energy: Managing the Transition

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In the period since the 1973 "oil shock," the governments of the industrial democracies have made some progress in adjusting their economies to higher oil prices and in developing alternative sources of energy, but serious energy and energy-related problems remain unresolved. Governments, by and large, have not shown that they understand the magnitude of the problems they face, nor have they defined, with any degree of clarity, how they intend to deal with them. As a result, there is still a great deal of confusion about the nature of the energy problem and its implications for world political and economic order.

This report attempts to clarify the complex range of issues surrounding energy by dividing the future into three time periods short term (zero to five years), medium term (five to ten years), and longer term (beyond ten years) and identifying the risks and problems associated with each period. In the short term and continuing into the medium and longer terms the most serious risk is the possibility of the sudden curtailment or disruption of world oil supplies. In the medium term, there is, in addition, the possibility of a financial crisis associated with mounting external debts of some of the more vulnerable less developed countries (LDCS) and the weaker semi-industrialized countries. These debts could become a problem in the event that a further slowdown in world economic growth were to occur which persisted for a prolonged period of time. The danger of a breakdown in the world's financial system would be substantially reduced (and perhaps eliminated) if changes are made in the structure of international financial institutions to permit additional credit accommodations to weaker economies and the further rescheduling of existing debts.

In the longer term, the major tnreat is that, as world oil production levels off or begins to decline, oil prices could increase precipitously, exacerbating any financial problems that might occur in the medium term and bringing serious economic dislocations. It is this latter threat that we regard as the most serious and the one for which the Trilateral governments must fashion a coordinated energy strategy. In the absence of such a strategy, it will be more difficult to manage the transition to an era of gradually declining world oil and natural gas production an era when it will be necessary to shift to a new generation of energy technologies.

Energy Forecast

The report provides a discussion of several recent world oil forecasts (Chapter II). After analyzing recent forecasts, we judge it unlikely that there will be any sharp and sudden upward movement in real prices of oil for at least the next ten to fifteen years a judgment less alarmist than some others. There is a very wide band of uncertainty involved in these judgments, however, and for this reason, it seems prudent to plan for a future of gradually rising real oil prices (at an annual rate of perhaps 2 to 5 percent) beginning in the early or mid-1980s, and to develop contingency plans flexible enough to deal with the possibility of sharper price changes which could occur in the event of an unexpected supply curtailment or if production limits are imposed by Saudi Arabia or other key producers.

Without effective advance cooperation among the Trilateral countries, sharp energy price increases, beyond their dislocating economic effects, could place heavy strains on the ties that bind these countries together. Furthermore, the LDCS, less institutionalized and therefore more susceptible to economic reversals, would probably suffer even greater instability under a pessimistic energy price scenario. And, even the energy suppliers (principally OPEC), dependent as they are on their ties with the industrialized world for the achievement of many of their economic, political, and strategic objectives, would not be immune from the shock of world political and economic instability.

Trilateral Responses

The report analyzes the energy policy responses of the United States, European, Japanese, and Canadian governments in the 1973 to 1977 period and identifies areas where more vigorous action is called for. The United States performance is particularly significant since it is the largest importer of oil in the industrialized world and accounts for half of all energy consumed by the International Energy Agency (TEA) members. The report concludes that the U.S. has not lived up to the leadership role expected of it, but that the Carter Administration initiatives provide some basis for hope that United States performance with respect to central Trilateral goals may improve significantly in the near future. The importance of such a change cannot be overemphasized. Reductions of projected 1985 United States import demand by 3 or 4 million barrels per day could contribute significantly to delaying any large energy price increases and help restore confidence in the dollar.

European governments have also experienced difficulty in developing broad-based energy programs. The European Community, due mainly to slower economic growth, is likely to stabilize import dependence until 1985 at 1973 levels, which would mean some reduction in proportionate dependence on imports. Differences among European countries particularly between the energy-rich and energy-poor have, however, prevented the formulation of a common European energy policy and harmonization of national policies. Furthermore, individual country actions have been less than might have been hoped for given the vulnerability of Europe.

The impact of the "oil shock" on the Japanese economy was severe. In the course of two revisions of its long-term energy program, the.government has substantially reduced 1985 primary energy supply targets. The new goals, while consistent with a 6 percent annual GNP growth, will only be achieved with great difficulty and will require major new government initiatives. One of the critical questions confronting Japanese energy policy is the role of nuclear power a subject on which there is disagreement within Japan and between Japan and the United States. It is important to maintain a vigorous U.S.-Japanese dialogue on the nuclear question and to resolve the issues dividing the two nations.

Canada has had some success in developing a comprehensive energy policy. The 1973 embargo brought into focus for Canadians the value of domestic energy resources and the national goal is now to become "energy self-reliant" by holding imports in 1985 to 800 thousand barrels per day. Despite some initial difficulty, particularly federal-provincial differences, the Canadian government has been able to develop some programs to encourage domestic supply expansion which can serve as models for other Trilateral governments, although reliance on market mechanisms still remains less than might be desirable.

The report also assesses multilateral responses to the oil crisis including the institutional arrangements that were established to deal with ( I ) supply security, (2) the financial burden of higher oil prices, (3) dialogue with the OPEC countries and nonoil-exporting LDCS, and (4) nuclear weapons proliferation. The most important initiative to deal with supply security has been the IEA emergency allocation program, which provides a potentially helpful insurance mechanism for use in relatively short-term oil supply interruptions but is not a means of managing a chronic shortage. To deal with the financial burden of higher oil prices, the IMF and the World Bank have taken some useful initiatives; nevertheless, doubts remain regarding the future capacity of the international financial system to cope with the strains associated with the financing of balance of payments deficits. In the North-South dialogue, the Conference on International Economic Cooperation (CIEC) helped nurture more common general energy views, though little formal success was achieved in dealing with pressing issues. Finally, two major international efforts have been launched in the nuclear energy area to reduce the risks of nuclear weapons proliferation the Nuclear Suppliers Club and the International Nuclear Fuel Cycle Evaluation but much work remains to be done (including strengthening the existing safeguards system) before these efforts are successful.

Recommendations

The report recommends a coordinated Trilateral approach to energy problems as well as vigorous action on the part of individual governments. The recommendations are directed to the three major energy problems identified in the report supply security, potential financial crisis, and the orderly management of the transition to a new generation of energy technology. For a coordinated approach to these problems to be successful requires, in addition to stronger commitment to cooperation and advance planning, two general preconditions:

* the creation of a process for the more careful monitoring of international energy as a total system; and

* a heightened public awareness and understanding of energy problems in the Trilateral nations, especially the United States.

Solving the immediate problem of ensuring supply security requires that:

* emergency stockpiles in the more vulnerable Trilateral countries, such as Japan, be increased;

* efforts be continued to resolve the Arab-Israeli conflict to bring stability to the Middle East; and

* the United States maintain its "special relationship" with Saudi Arabia the world's pivotal oil producer and with Iran, although the United States must remain in close consultation with other Trilateral governments regarding this relationship.

Providing a solution to the medium-term problem of a potential financial crisis requires that:

* the International Monetary Fund be strengthened and broadened in its role as the focal point for short-term balance-of-payments financing, including a further increase in IMF quotas, and ratification and expansion of the IMF "Witteveen Facility";

* long-term development financing to LDCs be substantially increased, and efforts made to create additional mechanisms for channeling OPEC funds into this type of financing;

* the mix of assistance to LDCs flowing through international institutions be increased and a multilateral co-financing guarantee facility be established as well as arrangements for joint IMF-private financing programs; and

* a combination of steps be taken by the major trading nations to create more orderly conditions in international financial markets, including early efforts by the United States to reduce oil imports, thereby curtailing its balance-of-payments deficit and helping to strengthen the dollar.

The long-term problem of insuring an orderly transition to highercost energy requires a number of actions many of which must be taken by individual governments:

* Energy prices. Each Trilateral government, at a minimum, should take steps to move its domestic energy prices as rapidly as possible to world market levels. Yet, even these levels may provide inadequate incentive for development of substitutable alternatives to oil or for reduction of growth in energy demand as rapidly as would be desirable; consequently, Trilateral governments might consider (1 ) mechanisms such as excise taxes for raising prices above world levels, and (2) special incentives to industry to encourage the development of alternative sources of supply.

* Import reduction. The IEA group import target of no more than 26 million barrels per day by 1985, though useful, provides little concrete basis for assessing national performance. Trilateral countries should agree on a series of specific individual country goals for energy consumption. efficiency of use, increase of supplies and reduction of import dependence, and individual governments should initiate energy policies to ensure that these demand reductions and supply increase goals are met. United States progress in initiating such policies and meeting its goals will be critical.

* Development of neh, LDC energy resources. The Trilateral governments should provide Mechanisms to help LDCs develop indigenous energy resources, particularly when political risks discourage involvement of international energy companies. Such development will ease demand for OPEC oil, stimulate internal economic growth and strengthen the LDC financial position.

* Cooperation with OPEC. The Trilateral governments should remove artificial barriers to long-term investment of OPEC funds and ensure access of OPEC exports to world markets, thereby encouraging continued expansion of OPEC oil production, especially by the "low-absorbers" with little domestic need for additional revenue. They should also explore possibilities of cooperation with OPEC wherever possible, particularly with regard to joint efforts to assist the LDCS.

* Joint nuclear policies. Trilateral governments should develop a joint policy on nuclear energy and nuclear weapons proliferation as rapidly as possible. The INFCE which is dealing with a complex range of technical issues should be supplemented with Complementary exploration of political and institutional arrangements to slow nuclear weapons proliferation. High priority should be given to establishment of an international "fuel bank" and a system for the international registry of uranium contracts, to assure the availability of uranium to importing nations. High priority should also be given to an international agreement for dealing with nuclear waste and spent fuel. Lower priority should be assigned to regional reprocessing and enrichment centers.

Member countries should move quickly to strengthen nuclear suppliers' guidelines to include "full-scope safeguards," i.e., agreements to have all nuclear facilities under International Atomic Energy Agency (IAEA) safeguards. And, Trilateral governments should take a strong stand in support of the IAEA inspection system that is responsible for guarding against unlawful diversion of peaceful nuclear material.

* Research and development. To prepare for the eventual decline of world oil supplies, each Trilateral government should consider targets for research and development, funding to develop new, reliable, environmentally sound sources of energy. Such targets might be based on a combination of factors, such as GNP growth, import dependency, domestic production and energy resource base. Furthermore, bilateral and multilateral research and development initiatives should be encouraged, particularly the proposed Japan-United States program for the development of longer range energy technology including nuclear fusion, solar, and advanced deep sea drilling technology.

Finally, the authors recommend that a future summit meeting be convened with the principal focus on energy issues in order to emphasize the seriousness of the energy supply-demand problem and inaugurate, where appropriate, new agreements or institutions. A formal summit seems the best way to lift the curtain of public indifference that regularly obscures even the most important events in the area of international energy. At such a meeting, it would be important for leaders in the Trilateral countries to underscore the point that economic stagnation is a poor solution to the energy problem. Economic growth is not only compatible with managing an orderly transition to new energy sources; it is essential. Unless the economies in the industrialized countries are growing, they will not generate the investment capital needed to develop new sources of energy or to replace obsolete, energy-inefficient industrial plants and equipment.

Authors

John C. Sawhill, President, New York University
Keichi Oshima, Professor of Nuclear Engineering, University of Tokyo
Hanns W. Maull, European Secretary, The Trilateral Commission

Franklin Tugwell, Associate Professor of Government, Pomona College, California (Special Consultant)

Table of Contents

Summary of the Report
I. Introduction
II. Defining the Transition Problem

A. Recent Forecasts of World Oil Supplies and Demand
B. Economic and Political Implications of Oil Price Increases
III. Assessment of Trilateral Responses Since the "Oil Shock"
A. Overall Comparisons
B. United States Response
- Post-Embargo Policy Developments
- The Carter Program
- Summary
C. European Response
- Post-Embargo Policy Developments
- Research and Development
- Summary
D. Japanese Response
- The New Energy Program
- Nuclear Energy
- Stockpiles
- Summary
E. Canadian Response
- Post-Embargo Policy Developments
- New Energy Projects
- Energy Conservation
- Summary
F. Response of International Institutions
- Supply Security
- Financial Burden of Higher Oil Prices
- Global Dialogue
- Nuclear Energy
- Recent International Energy Agency Initiatives
IV. Elements of an Energy Transition Strategy
A. The Short-Term Problem Assuring Supply Security
- Emergency Arrangements
- The Arab-Israeli Conflict
- Cultivating a "Special Relationship" with Saudi Arabia
B. The Medium-Term Problem Avoiding Financial Crisis
C. The Long-Term Problem Managing the Transition to Higher-Cost Energy
- A Pricing Strategy for Trilateral Countries
- Import Reduction Policies
- LDC Energy Production
- Cooperation with OPEC
- Inducements to Communist Countries to Expand Production
- Reassessment of the Nuclear Option
- Strengthened Research and Development Programs
- Other Opportunities for Trilateral Cooperation
- Continuing the North-South Dialogue
V. Conclusions

  • Topics: Energy, Multilateral Cooperation
  • Region:  North America, Europe, Middle East, Pacific Asia
  • Publisher:  The Trilateral Commission
  • Publication Date:  © 1978
  • ISBN:  0-930503-40-6
  • Pages:  92
  • Complete Text: Click here to download
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