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New Contenders Rise in the Battle for Energy Dominance
Edward L. Morse

If Darwin's theory of survival of the fittest is applicable to the oil and gas industry, then top oil-producing countries such as Saudi Arabia should keep a wary eye on the smarter, fleeter countries emerging as leading producers. And the long-term implications of how that battle is waged and who wins it are perhaps more critical to the energy security of the United States than the current hostilities. So says Edward L. Morse, a member of the Center for Energy, Marine Transportation and Public Policy, housed at the School of International and Public Affairs.

Morse also directs the center's Energy Leadership Forum, a program that facilitates discussion among nongovernmental organizations, public interest groups, private sector companies and other stakeholders in energy policy.

The center's mission is to increase understanding of the many factors that affect global energy policy. Economics, the environment, technology, resource management and politics all play a role in the formation of this policy, and these fields are core strengths of the center's programs and considerable resources.

Morse, a former deputy assistant secretary of state and executive adviser at Hess Energy Trading Co., could consider himself one of those resources. He contends that there is a war going on in plain sight that few outside the oil and gas industry have noticed. That war, a battle for dominance among the world's leading oil producers, historically has been controlled by Saudi Arabia. But countries such as Russia and China are entering the fray, and their presence is affecting the balance of power.

Saudi Arabia contains the largest oil reserves in the world by far, an estimated 261.7 billion barrels. By comparison, Canada is a distant second (if "unconventional" oil sands are considered) with 179 billion barrels of proven reserves and Iraq third with 115 billion barrels. Saudi Arabia is also the world's largest oil producer, recently churning out roughly 9.95 million barrels a day. And as the leader of the Organization of Petroleum Exporting Countries (OPEC), " Saudi Arabia is in a position of dominance and controls the market either alone or by looping in other producers," says Morse.

Yet, according to Morse, the hierarchy of the oil industry may see a dramatic shift, as Russia muscles its way up the food chain and China becomes the nation with the fastest growing demand. Russia does not have the immense reserves of the Saudis, but it can match the Middle Eastern country's production, he says. However, a lack of transparency in the management of oil revenues and an aversion to foreign investment deprive it of the capital necessary to maximize and stabilize its production. Another challenge facing the country is its geographic disadvantage, which Morse believes it can overcome by developing deep-water ports for large tankers and expanding its pipelines toward the Asian perimeter.

Despite these difficulties, Russia has made impressive reforms during the past several years, according to government sources, growing oil exports by more than 60 percent from 1998 to 2003, and is now poised to assume a more prominent position in the global marketplace. Currently, Russia is not a direct threat to Saudi dominance, but if it overcomes its anxiety with regard to foreign investment and attracts the capital needed to expand its pipelines, it could be.

China is another rising power in the oil and gas industry, not the least because of its increasing demand, which is second only to that of the United States. According to Morse, " China thinks [it has] been unfairly excluded from the oil game" -- and he thinks they're intent on changing the rules to their advantage.

The United States controls the shipping lanes that very large crude carriers (VLCCs) and other tankers use to bring oil imports to Asia, says Morse. Fears that U.S. interests are not in synch with its own, climbing oil prices and the possibility of shortages have prompted China, he says, to begin storing an oil reserve, which served to raise prices even higher last year. China's net imports for the first quarter of 2004 were 41 percent higher than for first quarter 2003. That increased demand, coupled with that of its U.S. counterpart, has created a capacity squeeze, which producers will be scrambling eagerly to fill.

And Iraq, despite 115 billion barrels of proven reserves and estimates of even larger undiscovered fields, is unlikely to play a critical role in the near future. " Iraq is three to five years from producing near its 1990 levels and five years away from attracting needed capital," notes Morse.

But, offers Morse, the factor with perhaps "the greatest potential to change the balance of power in the oil and gas industry is the changing leadership in Saudi Arabia." In 2003, to the shock of most of the world, Saudi Arabia -- for more than 70 years an autocracy ruled exclusively by members of the Saud family -- announced that it would hold municipal elections within one year. Most analysts attributed this move away from tradition as a sign of the influence of Crown Prince Abdullah, who is next in line to the Saudi throne. If Prince Abdullah assumes the throne, even bolder changes may follow, including moves toward democratization, which could produce a domino effect among oil-producing Middle East nations and thereby greatly alter the geopolitical climate.

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Published: Jan 25, 2005
Last modified: Jan 26, 2005

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