The Group of Seven and Global Energy Security

Professor Casimir YostSenior Fellow

Institute for the Study of DiplomacyWashington, D.C.

January 2016

It was the best of times, it was the worst of times, it was the age of wisdom, it was the age of foolishness.

– Charles Dickens, A Tale of Two Cities (1859)

We are facing the most diverse array of threats I have seen in my fifty years in the intelligence business.

– James ClapperU.S. Director of National Intelligence (2015)

Summary Points

1. This is the “best of times.” In 1990, 37% of the world’s population lived in extreme poverty. Today, that percentage is under 10%. And the world’s population in 2015 was 2 billion larger than 1990. Technology has opened huge opportunities for mankind.

2. Director Clapper is also right—threats are “diverse.” The trends we can anticipate now—especially the broad diffusion of power within the Eurasian landmass from Tokyo to London—point to a challenging future.

3. The 2016 agenda of issues facing world leaders is deeply sobering. This agenda includes: fragile and uneven economic growth, collapsing state authority and rising sectarian conflict in the Middle East, and two deeply authoritarian states—China and Russia—whose future trajectories are uncertain and potentially disruptive.

4. The Group of Seven (G-7) leaders and cabinet officials, meeting in Japan in May 2016, lack the political and economic weight that once was theirs, but their cohesion and leadership will be consequential and important in confronting the world’s problems. If they cannot “lead,” the rest of the world is in trouble.

My Talk

• Global Trends – The Long View – Drivers of Change

• Here and Now – 2016 Challenges – An Agenda for the G-7

• The Group of Seven (G-7) and Global Energy Security

Global Trends: The Long View –Drivers of Change

(“Global Trends 2030: Alternative Worlds” National Intelligence Council (2010))

Four Megatrends1. Individual Empowerment

• Rise of the global middle class• Individuals empowered by information technology (IT)• From ISIS to Doctors Without Borders• Unhappiness with elites.

2. Diffusion of Power• In 2004 developed states held 54 % of global GDP on a PPP basis—

by 2014 they held 43%• Power to block or set an agenda can be as or more important than the

power to act.• There are now competing models to the liberal democratic order—

authoritarian and religious.

3. Demographic Patterns• World’s population will grow from 7.2 billion in 2010 to

8.2 billion in 2030.• Two countries with populations in excess of 1 billion.• 54% of world’s population live in urban areas: this will

increase to 66% by 2050. 90% percent of the increase will come in Asia and Africa. Rise of Megacities.

• Aging populations (Japan-median age: 46, Germany), soon to be aging (China: median age 36), declining populations (Russia, Japan). Budgetary and economic implications.

• Youthful populations (Yemen, Afghanistan, Nigeria: median age 18). Implications for violence.

4. Growing Food, Water, Energy Nexus• “We judge that the overall risk of food insecurity in many

countries of strategic importance to the United States will increase during the next ten years.” (National Intelligence Council)

• “Water problems will hinder the ability of key countries to produce food and generate energy, posing a risk to global food markets and hobbling economic growth.” (National Intelligence Council)

• Upstream versus downstream countries.• The transition from fossil fuels to renewables is certain to

be slow and uneven.

5. Implications for Climate Change• Urbanization and rising global middle class will increase

pressures on global resources, including petroleum and coal.

• China and India both have life-threatening pollution problems.

• Yet, India has 200 to 300 million of its citizens without access to electricity. Globally, this figure is more than 1 billion. For them, coal is part of the solution.

• “It’s doubtful that we’ll hold the line at 2 degrees Celsius, but we need to give it our best shot. With scenarios that exceed that target, we are talking about enormous changes in global precipitation and temperature patterns, huge impacts on water and food security , and significant sea level rise.” (Piers J. Sellers : NASA scientist)

Here and Now – 2016 Challenges:An Agenda of Issues for the G-7

Assumptions– In a globalized world, everything is connected. For

example, reduced Chinese demand adversely affects the global economy.

– The pace of technological change will move more rapidly than the pace of government regulation. For example, ISIS is using encrypted Twitter to enlist its terrorist recruits.

– None of the world’s major challenges can be solved by one country, nor can solutions be imposed by a few countries in an era of defused power. (This point has significant implications for US leadership in the 21st

Century.)

– Asian regionalism will proceed-at times-without the United States

– The leaders of every single country in the world today must confront difficult domestic challenges that are both easier—because of trade and communications—to solve and more difficult because of some of the same impacts of globalization – for example, loss of jobs to technology and trade.

– The “world” ahead will involve tough choices for leaders. For example, economic growth may have negative environmental implications.

– The leaders of at least four major Asian countries are attempting significant reforms. (India, Japan, China and Indonesia)

– Both in Europe and Asia national leaders must balance economic interdependence with and security vulnerability to regional hegemons.

– “The days when the heads of the G-7 industrial powers like the U.S. and Germany controlled geopolitics and the global economy are gone for good. Many years in the making, a G-Zero world is now fully upon us.”

Ian Bremmer, President, Eurasia Group

2016 Challenges1. Economic

Question: What will drive global economic growth in 2016?

GDP growth, actual and projected

World Bank, Global Economic Prospects, January 2016

2. Collapsing Middle EastQuestion: How bad can it get?

“Behind Stark Political Divisions, a More Complex Map of Sunnis and Shiites”The New York Times, January 2016

3. Refugees and MigrantsQuestion: How bad can it get?

“Migrant crisis: Migration to Europe explained in graphics”BBC, December 2015

4. ChinaQuestion: Which is of greater concern – a strong China or a weak China?

“China’s Capital Flight”, Bloomberg Businessweek, January 2016

5. RussiaQuestion: What are Putin’s goals?

6. The United StatesQuestion: Can the United States still lead or is it faltering?

Group of Seven (G7) and Global Energy Security

1. What is it? • G-7 consists of Canada, France, Germany, Italy,

Japan, United Kingdom, United States, and representatives of the European Union.

• The G-7 members are the seven economically advanced democracies representing collectively roughly 64% percent of global wealth ($263 Trillion). They represent 46% of global GDP at market exchange rates and 32% at PPP (purchasing power parity.)

• G-7 had its origins in a meeting held at Rambouillet in France in 1975 focused on economic issues.

• The annual G-7 meetings are now attended by heads of government as well as important cabinet ministers.

• In 1997 Russia joined as a member turning the gathering into a G-8 but was disinvited in 2014 following its seizure of Crimea.

• The 42nd G-7 Summit will be held May 26-27, 2016 on Kashiko Island, Shima, Mie Prefecture with ten side ministerial meetings around Japan in April, May and September.

• The 2016 meetings will certainly focus on global economic issues but much else given its membership.

Group of Seven and Global Energy Security

• Summary• Global energy futures are tied to global economic

security futures. Energy demand tied to Asian demand. Chinese and Indian demand will drive global demand.

• Beginning in 2014, petroleum prices began dropping because supply exceeded demand.

• Petroleum importing countries and consumers have benefitted.

• Petroleum exporting countries have been hurt.

• Surprises have included: the collapse of petroleum prices, the durability of the U.S. shale oil and gas production, and the failure of Middle East turmoil to drive up prices – so far.

• Global demand for fossil fuels will, however, continue to force up fossil fuel CO2 emissions. The investment in environmental technology and renewables is essential.

• Question #1 What has driven down prices?• Oil prices have dropped almost 75% in the last 18

months• Rising global production: Russia, China, Iran• Fear of declining global demand---China • OPEC/Saudi Arabia refusal to cut production• Significant global storage of supply.• Oil market could “drown in oversupply.”

(International Energy Agency-2016)

“Today in Energy”, U.S. Energy Information Administration, January 2016

Oil Prices (March 2015-Present)

• Question #2– Who has benefitted from lower prices? (Winners)

• Consumers• Importers (India)

• Question #3– Who has been hurt by lower prices? (Losers)

• Petroleum exporters–OPEC members–Russia

• Petroleum companies• U.S. shale oil producers• Investment in new sources of energy, including

renewables

• Question #4– What surprises over the last 18 months?

• Impact of U.S. shale oil and gas revolution and its durability

• How low prices could go• The refusal of OPEC to cut production • The fact that Middle East turmoil has not put

upward pressure on prices.

• Question #5– Energy and Climate Change

“BP Energy Outlook 2035,” January 2016

“BP Energy Outlook 2035,” January 2016

“BP Energy Outlook 2035,” January 2016

• Question #6 What are the Implications for Energy Security ?

• One implication, of course, is that if current projections are right that climate change effects (disruptive weather events, sea level rise, melting ice caps) are destined to get worse before global warming can be reversed than the world may have to confront issues of mass migration, food insecurity and water shortages more challenging than anything faced thus far.

• Transport Uncertainties “World chokepoints for maritime transit of oil are a critical part of global energy security. About 63% of the world’s oil production moves on maritime routes. The Strait of Hormuz and the Strait of Malacca are the world’s most important strategic chokepoints by volume of oil transit.”

–US Energy Information Administration (2014)

• Strait of Hormuz– The EIA estimates that more than 85% of crude oil

that passed through the Strait of Hormuz went to Asian markets.

– At present, only Saudi Arabia and the UAE have developed any alternate delivery options to bypass Hormuz.

• South China Sea– The South China Sea is a contested body of water

with geostrategic importance:• 1/3 of global crude oil and ½ of global LNG passes

through the South China Sea

“The South China Sea is an important world energy trade route,” U.S. Energy Information Administration, April 2013

• Question #7– The Group of Seven (G-7) and Energy Security

• The issue of energy subsidies• Investment in renewables • Support for emerging economies either in crisis

from the effects of climate change or trying to make the shift to renewable energy sources.