The Quest: Energy, Security, and the Remaking of the Modern World

by Daniel Yergin

  Since the system’s inception 30 years ago, IEA members have only three times triggered an actual emergency drawdown of strategic stockpiles. The first time was during the Gulf crisis of 1990–91. In January 1991, just before hostilities commenced, the IEA coordinated a release from strategic stockpiles around the world. The other coordinated release occurred in the summer of 2005, to deal with a different kind of disruption—that of Hurricanes Katrina and Rita. One can be sure that the founders of the IEA never contemplated that the emergency sharing system would be used for a disruption in the United States. The third time it was used was 2011, in response to the persisting loss of supply from the Libyan civil war and concern about the impact of high prices on economic recovery.

  Over time, the IEA has evolved, and today one of its missions is to help promote dialogues with non-IEA consuming countries and with energy-exporting countries, OPEC and non-OPEC alike. This reflects a larger shift in relations among oil-importing and oil-exporting countries, away from the confrontation of the 1970s to what has become known as consumer-producer dialogue.8 If the International Energy Treaty was the foundation for the development of a global energy security system, then the development of the producer-consumer dialogue represented the next stage in its development.

  The first public step toward a producer-consumer dialogue was a seminar at the Hotel Kleber in Paris in the first two days of July 1991. The Gulf War had ended just a few months earlier. As the October War had set the framework for confrontation, so now the Gulf War had reset the framework and opened the door to dialogue. For in coordination with consumers, OPEC countries had ratcheted up production to compensate for the loss of output from Iraq and Kuwait. (Of course, several of them, led by Saudi Arabia, were also members of the coalition, and protecting Saudi Arabia’s oil fields against Iraq was one of the major objectives of the coalition.) This demonstrated what was now perceived as shared interests in energy security and stability in oil markets. After the meeting the French minister of industry reported that the seminar had allowed the delegates to “break certain taboos and even to propose joint projects. The era of confrontation, we hope, is over; dialogue and communication must take its place.” Not everyone was ready to break all the taboos. To maintain a certain distance, the U.S. delegation insisted on not sitting at the main table but rather at a sort of little “children’s table” off to the side.

  Efforts at a dialogue gained momentum, although, initially, somewhat furtively. It took a year to arrange, but in 1994 the head of the IEA went to Vienna to meet with the head of OPEC. Still, it was a secret get-together and it was conducted out of the office, over a private out-of-sight lunch at a Viennese restaurant. That was the beginning of a continuing exchange, in a variety of forums, on everything from energy security, investment regimes, and volatility in oil prices, to the aging of the workforce, carbon capture and storage, and—of some importance—improving the transparency and quality of energy data. The exporting countries had come to hold significant stakes in the growth and health of the global economy, which, after all, is the market for their oil and where much of their sovereign wealth funds are invested. For the consuming countries, lingering taboos dissipated with time. By 2009 the G8 industrial countries were calling upon “both producers and consumers to enhance transparency and strengthen their dialogue” and move “toward a more structured dialogue” among “producing, transit and consuming countries.”9

  The mechanism for this dialogue became the International Energy Forum. One of its missions is to spearhead JODI—the Joint Oil Data Initiative. The objective is to provide a more complete and transparent view of supply and demand and inventories so that world markets can operate on the basis of better information. The countries participating in the forum represent 90 percent of global oil and natural gas production and demand. Both the IEA and OPEC are members.

  The producer-consumer dialogue provides a framework for communication; it responds to the interests that both sides have owing to their interdependence in terms of a vital commodity. But it certainly has its limits. The real test is not how it works during a time of stability but during a time of stress. During the price spike of 2008, it provided a mechanism for trying to restore stability to the market. Without it, the spike might have gone even higher, with greater damage to the global economy. The renewed oil market turmoil of 2011 and the sharp division among OPEC exporters—particularly Saudi Arabia versus Iran and Venezuela—showed those limits. Saudi minister Ali Naimi captured that when he described the June 2011 OPEC meeting as “one of the worst meetings we ever had.” This was a demonstration that any dialogue really depends on the relationships not among blocs but among specific nations and how they see their interests and the degree to which they can act upon those interests.

  OPERATING SYSTEMS

  Experience in the decades since the creation of the IEA has highlighted broad principles that underpin the emergency system and inform all of the dimensions of energy security.

  The starting point is what Winston Churchill urged a century ago—diversification of supply. Multiplying one’s sources of oil, and one’s sources of energy, reduces the impact of a disruption by providing alternatives. This should serve the interests not only of consumers but also of those producers for whom stable markets are a long-term concern.

  Resilience should be ingrained in the energy system, ensuring a security margin that provides a buffer against shocks and facilitates flexibility and recovery after disruptions. Resilience can include sufficient spare production capacity in oil-exporting countries and, of course, strategic reserves like the SPR. It extends to adequate storage capacity along the supply chain and backup stockpiling of equipment and critical parts for electric power production and distribution, such as transformers for substations. Hurricanes Katrina and Rita and the 2011 Japanese earthquake and tsunami highlight the need to develop plans for recovery from disruptions that devastate large regions.

  Overall, the reality of integration needs to be recognized. Only one oil market exists. This market is a complex, worldwide system that moves and consumes almost 90 million barrels of oil every day. Let there be a disruption in one part of the world, and the effects will reverberate throughout the market. Security resides in the stability of this market. Secession from the global market is not an option, except at very great cost.

  Experience has consistently demonstrated the importance of high-quality information and data for well-functioning markets and future investment. The Energy Information Administration, an independent arm of the U.S. Department of Energy, and the International Energy Agency, along with the new International Energy Forum, contribute to meeting that need. Access to reliable and timely information becomes particularly urgent in a crisis, when a mixture of actual disruptions, rumors, media imagery, and outright fear stokes panic among consumers. Accusations, acrimony, outrage, the pressures of the news cycle, the dusting off of familiar scripts, and a fevered hunt for conspiracies—all these can obscure the realities of supply and demand, transforming a difficult situation into something much worse. Particularly at such times, governments and the private sector need to collaborate to counter the tendency toward panic and guesswork with the antidote of high-quality, highly timely information.

  Markets—large, flexible, and well-functioning energy markets—contribute to security by absorbing shocks and allowing supply and demand to respond more quickly and with much greater ingenuity than is possible within a controlled system. Markets can often more efficiently and effectively—and more quickly—resolve shortfalls and disruptions than more centralized direction.

  When troubles do arise and the calls “to do something” grow loud, governments do well to be cautious, to the degree they can, in responding to the short-term political pressures and the temptation to micromanage markets. However well meaning, intervention and controls can backfire, slowing and even preventing the moving around of supplies to mitigate disruptions and speed adjustment.

  The gas lines in th
e 1970s were, as already noted, self-inflicted by rigid government policies—price controls and a heavy-handed federal allocation system that seriously misallocated gasoline. In other words, policy prevented markets from working.

  In 2005 the huge disruption to supply resulting from Hurricanes Katrina and Rita seemed destined to create shortages, which—compounded by rumors of price gouging and stations’ running out of supplies—could have swiftly generated gas lines. But that is not what happened. In contrast to the 1970s, steps were taken to help markets shift supplies around more quickly and reduce the impact of the crisis.

  Instead of adding new regulatory restrictions—two critical ones were eased. Non-U.S.-flagged tankers were permitted to pick up supplies trapped on the Gulf Coast by the nonoperation of pipelines and carry them around Florida to the East Coast. The “boutique gasoline” regulation, requiring different blends of gasolines for different cities, was temporarily lifted to allow the shifting of supplies from cities that were relatively well supplied to cities where there were potential shortages. Overall, the calls for controls were resisted. The markets moved back into balance much sooner, and prices came down much faster, than had been generally expected.

  Energy security still needs to be expanded in response to changes in the infrastructure of information technology, the transformation of the world economy itself, and the need to protect the entire supply chain.

  CYBERATTACK: “A BAD NEW WORLD”

  The sea-lanes are not the only kind of routes that are vulnerable. The threats to energy security loom large in a different kind of geography—cyberspace. In 2010 the U.S. director of national intelligence identified cybersecurity as one of the top threats to the United States. The “information infrastructure,” warned his Annual Threat Assessment, is “severely threatened.” The assessment added: “We cannot be certain that our cyberspace infrastructure will remain available and reliable during a time of crisis.” Since then, one of the authors of the report has said “the situation has become worse.” Even those entities that are considered to be the most highly protected, such as financial institutions and sophisticated IT companies, have been subject to successful attacks. After Sony suffered a major cyberattack, its CEO summarized the situation this way: “It’s not a brave new world; it’s a bad new world.”

  For obvious reasons, the electric power system is ranked among the most critical of all infrastructures. One report described the vastness of the North American power infrastructure this way: “Distributed across thousands of square miles, three countries, and over complex terrain (from the remote plains and Rocky Mountains to major urban areas), the bulk power system is comprised of over 200,000 miles of high-voltage transmission lines, thousands of generation plants, and millions of digital controls.” It is also one of the most complicated to secure. After all, it has been built up over decades. In the 1960s and 1970s, computers were deployed to manage the generation and distribution of electricity and to integrate the grid. In the years since, the system has become more sophisticated and integrated. This makes the system far more efficient, but it also makes it more vulnerable.10

  The potential marauders may be recreational hackers, who, despite their benign appellation, can do great damage, as can a disaffected employee. They can be cybercriminals, seeking to steal money or intellectual property, or gain commercial advantage, or create situations from which they can profit. They can be governments engaged in espionage or positioning for, or actually conducting, cyberwarfare. Or they can be terrorists or other non-state actors using digital tools to wreak havoc and disrupt their avowed enemies. For all of these, the electric grid is a very obvious target, for its disruption can immobilize a large segment of a country and do great harm.

  The tools available to the cyberattacker are extensive. They can mobilize networks of computers to mount a “bot attack” aimed at denial of service, shutting down systems. They can introduce malware—malicious software—that will cause systems to malfunction. Or they can seek, from remote locations, to take control of and disrupt systems.

  One point of entry is through the ubiquitous SCADA systems, the supervisory control and data acquisition computer systems that monitor and control every kind of industrial process. Originally, they were site specific, but now they are connected into larger information networks. Malicious intruders may gain access through a thumb drive and a desktop computer. A multitude of new entry points are provided by the proliferation of wireless devices and possibly by the smart meters that are part of the smart grid and that provide two-way communications between homes and the electrical distribution system.11

  A test at a national laboratory in 2007 showed what happened when a hacker infiltrated an electric system. A SCADA system was used to take control of a diesel generator and cause it to malfunction; it shook and shuddered and banged until it eventually blew itself up in a cloud of smoke. The Stuxnet virus that slipped into the Iranian centrifuges in 2010 caused them to spin out of control until they self-destructed.

  It is not just the power system that is at risk. Obviously, other systems—involving energy production, pipelines, and water—share similar vulnerabilities, as do all the major systems across an economy.

  In response to this threat, nations are struggling to design the policies to meet this threat. The U.S. Department of Defense has created a Cyber Command. It is also developing a new doctrine in which a major attack on critical infrastructure, including energy, could constitute an “act of war” that would justify military retaliation. The Council of Europe has established a convention on cybersecurity to guide national policies. But these need to be matched by efforts by companies and bolstered with considerable investment and focus. New security architectures have to be introduced into systems that were designed without such security in mind. And they need to be coordinated with other countries. After all, it takes only 135th of a millisecond for an attack to hit a server from anywhere in the world.

  Can active defense prevent a cyberattack that seriously damages electricity or some other major energy system, with all the dangerous consequences that can flow from it? Will the risks be properly anticipated and acted upon? Or will the analysis have to wait until a national commission goes back after a “cyber Pearl Harbor” and assesses what went wrong and what was missed—and what could have been done. “In the nineteenth century, steamboats regularly blew up,” one study noted, “but Congress waited 40 years until a long series of horrific accidents led to safety regulations.” At a recent meeting of 120 experts on cybersecurity, the question was asked: How long before a destructive cyberattack on the country? The consensus answer was bracing: within three years.12

  BRINGING CHINA AND INDIA “INSIDE”

  One of the fundamental reasons for establishing the IEA in the 1970s was to prevent that mad scramble for barrels that had sent prices spiraling upward and threatened to rip apart the Western alliance. It worked, establishing a system for more durable and constructive cooperation. That same kind of approach is needed now with China and India to help ensure that commercial competition does not turn into national rivalries, thus preventing future scrambles that inflame or even rupture relations among nations in times of stress or outright danger. Both China and India have moved from the self-sufficiency and isolation of a few decades ago to integration into the global economy. The energy consumption of both is rising rapidly; in 2009 China became the world’s largest energy consumer. Neither China nor India is a member of the IEA, and neither looks likely to become one anytime soon, both because of membership rules and their own interests.

  Yet even if they do not join, they can collaborate closely. If they are to engage on energy security, they have to come to the conclusion that their interests can be served and protected in global markets—that the system is not rigged against them and that they will not be disadvantaged compared with other countries in times of stress. And they would have to decide that participation, either formally or informally, with the international energy security syste
m will assure that their interests will be better served in the event of turbulence than going it alone. China, India, and Russia all now have memorandums of understanding with the IEA. Given their growing scale and their importance, their participation is essential for the system to work more effectively.

  SECURING THE SUPPLY CHAIN

  Energy security needs to be thought of not just in terms of energy supply itself but also in terms of the protection of the entire chain through which supplies move from initial production down to the final consumer. It is an awesome task. For the infrastructure and supply chains were built over many decades without the same emphasis on security as would be the case today. The system is vast—electric power plants, refineries, offshore platforms, terminals, ports, pipelines, high-voltage transmission lines, distribution wires, gas storage fields, storage tanks, substations, etc. The vulnerabilities of such extensive infrastructure take many forms, from outright hostile assaults to the kind of small events that can trigger a massive blackout.

  CHOKE POINTS FOR WORLD OIL

  The secure passage of tankers through narrow shipping channels is crucial to the global economy.

  Sources: EIA; ICC-CCS

  As the energy trade becomes more global and crosses more borders and grows in scale on both land and water, the security of the supply chains is more urgent. Ensuring their safety requires increased collaboration among both producers and consumers. Critical choke points along the sea routes create particular vulnerabilities for the transport of oil and LNG, whether from accidents, terrorist attacks, or military conflict.

  The best known of these choke points is the Strait of Hormuz, which separates the Persian Gulf (with more than a quarter of world oil production) from the Indian Ocean. Another key point is the Malacca Strait—the five-hundred-mile-long, narrow, and constricted passage between Malaysia and the Indonesian island of Sumatra that funnels in from the Indian Ocean, curves up around Singapore, and then widens out again into the open waters of the South China Sea. At its most narrow, it is only 40 miles in width. About 14 million barrels per day pass through this waterway, as does two thirds of internationally traded LNG—and half of all of world trade. Some 80 percent of Japan’s and South Korea’s oil and about 40 percent of China’s total supply traverse the strait. Pirates prey upon these waters, and there have been reports of terrorist plans to seize an oil tanker and wreak havoc with it.