A Thawing Frontier

Greenland’s icy frontier is transforming before our eyes. Climate change is contributing to a hastened retreat of the island’s massive ice sheet and ushering in new opportunities for the 57,000 people living in the northern hinterlands.

The island’s extractive industries are poised to be the biggest winner, as the thawed ice reveals new deposits of raw materials, everything from iron ore to aluminum.

(Read More: Rocking the Boat in the Energy Rich South China Sea)

Rare earths are the big prize. The small town of Narsaq sits near one of the world’s largest deposits of rare earths. According to Greenland Minerals and Energy Ltd, one of the island’s leading mineral development companies, that deposit could contain about 10.3 million metric tons of rare earth metals, equivalent to about 10 percent of the known global reserves (which today total about 110 million metric tons, according to the U.S. Geological Survey).

China is making a play for those resources, apparently, courting the government with infrastructure projects and other investments that are intended largely to help Chinese companies acquire the production rights to mineral deposits, including rare earths.

Rare Earth Dominance

Western officials are particularly concerned about China’s potential control over Greenland’s rare earths. Driving this angst is the fact that China has a near monopoly on the global rare earths market already (it produces about 97 percent of the world’s rare earths – even though it only holds about 50 percent of the known global reserves) and that Beijing limits rare earth exports to help satisfy its own domestic demand.

It is difficult to overstate that a steady global supply of rare earths is important. After all, these metals are critical to advanced technologies and have few – if any – reliable manufacturing substitutes. (Some technologies can substitute rare earths, but they do not have the same effective properties.) Consequently, China’s outsized share of the global market gives it some leverage over others, which it has used before for geopolitical gain.

Indeed, policymakers have fresh memories of China halting exports of rare earths to Japan in 2010 when the two countries were locked in a bitter maritime dispute in the East China Sea. While officials in Beijing claim they never sanctioned an embargo on rare earth exports, Chinese customs officials are reported to have prevented them from being loaded onto Japanese-bound freighters. Naturally, U.S. and other Western officials are concerned that China’s control of Greenland’s rare earths would only add to its sizeable share of the rare earths market and its ability to exert geopolitical pressure on those countries dependent on Chinese rare earths.

(Read More: How to Neutralize Energy Competition in the South China Sea)

But how worried should Western officials be about China’s potential monopoly on Greenland’s rare earths? A couple of points are worth mentioning that should help allay concerns.

First, China’s share of the rare earth market is in relative decline. Sure, China produces 97 percent of the world’s rare earth resources. But the United States has ample reserves as well; we are just not producing them – yet.

According to the U.S. Geological Survey, the United States holds about 13 million metric tons of rare earths, or about 12 percent of the known global reserves. The United States used to produce these minerals too. Yet when U.S. states adopted more rigorous environmental standards to protect local watersheds and the surrounding environment, U.S. producers found it much more difficult to compete with cheaper Chinese metals that did not need to follow the same production guidelines. So U.S. producers stopped extracting them.

But that is starting to change as prices rise, allowing U.S. producers to compete with Chinese industry. One of the largest U.S. mines is in Mountain Pass, California, where Molycorp is leading an effort to kick start production there. Meanwhile, Australia and Malaysia are planning projects to ramp up production of their known reserves as well. Other countries are likely to follow suit, including India and other states in Central Asia. Naturally, all these efforts will help diversify the market. So even if China secures the rights to Greenland’s rare earth metals, the market is already becoming more diverse, and there is little cause for concern that China will continue to monopolize the industry.

Second, China’s drive to develop Greenland’s rare earths may be driven more by its economic than geopolitical interests. Chinese production of rare earth elements appears to be in decline – particularly heavy rare earths that are used in advanced technologies. Naturally, Chinese industry leaders appear to be seeking to diversify their resource base. After all, global demand for these metals is on the rise and there are profits to be reaped from China sustaining its place as a major producer of rare earths. Greenland’s rare earth deposits present an opportunity for it to expand its sources of these minerals.

(Read More: Why China is Getting Their Feet Wet in the Oil Sands)

Moreover, there is really little incentive for officials in Beijing to wield the country’s rare earth industry for geopolitical gains. China’s 2010 embargo against Japan is more likely a one off event than the beginning of a pattern of behavior. After all, sparking a trade war with the West is not in Beijing’s interest. In fact, it was largely this incident in the first place that stoked Western concerns and kicked start growth in non-Chinese rare earth production.

Finally, China’s path to the Arctic runs through Greenland. Developing Greenland’s rare earth reserves may not offer any potent geopolitical benefits. But Greenland is footsteps from the Arctic, and officials in Beijing may be betting that Greenland can be China’s entrance to the top of the world. In that vein, developing the island’s rare earths and other minerals may just be a means to an end. Indeed, royalties and taxes from producing those raw materials, in addition to the other Chinese infrastructure projects, seem to already be helping China’s Arctic cause. For example, Beijing is seeking permanent observer status on the Arctic Council – the region’s intergovernmental forum – and Greenland has come out in strong support of its bid. If China is successful in getting observer status on the Council, Beijing would have stronger influence in shaping Arctic governance, including how to manage the region’s natural resource wealth.

But when it comes to China’s interest in Greenland’s rare earths, Beijing is acting more like a businessman than a boogeyman. So folks, a deep breath is in order. If Beijing does manage to acquire the exclusive rights to develop Greenland’s rare earths, don’t expect the geopolitical balance to go out of whack quite that easy.

1) Renewed vigor in Mexico’s moribund oil industry.

Mexico’s oil industry has been in a perpetual state of decline. In its heyday, the country was the world’s second largest oil producer, just behind the United States. But when the industry was nationalized in the 1930s, it all began to go south. Private foreign companies – with their capital, skills and technology – left the country and spent years seeking compensation from the government to cover their losses. In their place, the industry was left with the state-owned Petróleos Mexicanos – Pemex. Unfortunately, Pemex never quite brought the same resources to bear as its foreign competitors and has been plagued by technical deficiencies that have contributed to poor management of its oil fields and their subsequent decline. One need only look to Mexico’s Cantarell super-giant oil field as a case in point: production has sharply declined from about 2 million barrels a day (mbd) in 2004 to 400,000 barrels a day in April 2012. It bodes poorly for a government that relies on oil revenue for roughly 35 percent of its budget.

(Read More: Newly Found Mexican Oil Source Could Hold 1 Billion Barrels)

But all that is starting to change and Mexico’s moribund oil industry may be on the rebound.  Since his election in July, Mexican President Enrique Peña Nieto started the move toward privatization of the oil industry, which would help bring the necessary capital, technology and skills to onshore oilfields that have been in decline and the deepwater oil fields that have effectively gone untapped. If the industry does turn around, Peña Nieto may singlehandedly be responsible for unleashing the country’s energy potential, potentially adding as much as 1.6 mbd of petroleum to North American output by 2020.

2) China’s technological development in deepwater drilling.

China made great strides in strengthening its technological edge in deepwater drilling last year. In May 2012, the state-run China National Offshore Oil Company, CNOOC, began operating the country’s first deepwater drilling rig, putting CNOOC in a position to transform its reach by moving away from solely shallow water operations to new depths, including deepwater blocs of the South China Sea. This is particularly noteworthy since Chinese estimates place 70 percent of recoverable natural gas and oil deposits in deepwater of the South China Sea.

In December 2012, the Canadian government paved the way for CNOOC to acquire the Calgary-based energy giant, Nexen Inc.,including the company’s high-tech ultra deepwater drilling technology, which would add to CNOOC’s technological edge in deepwater drilling. The deal still faces some scrutiny from the U.S. Congress over Nexen’s Gulf of Mexico assets. Regardless though, as China continues to develop its edge in deepwater drilling technology, it will speed up the country’s ability to drill in deepwater blocs, adding a new layer of complexity to the South China Sea imbroglio. In particular, it may undermine the growing push for joint energy development as a regional rule of the road – especially if not longer needs to partner with foreign companies to drill to what was once unreachable depths.

3) India increasingly focuses on energy development in the South China Sea as part of its “Look East Policy.”

India shares many of the same energy vulnerabilities as other countries in East Asia, particularly a growing reliance on petroleum imports from the Middle East and North Africa. Those same vulnerabilities have contributed to New Delhi’s interest in exploring for energy in the South China Sea, which some countries, including China, view as a potential “second Persian Gulf.”

(Read More: How to Neutralize Energy Competition in the South China Sea)

Not surprisingly, New Delhi has sought joint development with countries in the region, including Vietnam, as a feature of its strategic engagement with countries eastward.  But India’s foray into the South China Sea has drawn China’s ire, which has protested India’s recent joint ventures with the Vietnam National Petroleum Corporation. To show its objections, CNOOC opened up blocs in the South China Sea for bidding last year that Vietnam had already contracted to India’s offshore company, ONGC Videsh. More recently, Chinese fishing boats blocked a Vietnamese seismic vessel in December, causing the ship’s cables to snap. The episode provoked a response from the Indian government, which said it would “consider sending navy vessels to protect its interests in the South China Sea.” This may lay the groundwork for a greater Indian naval involvement in the South China Sea in 2013; it is something worth watching.

4) Piracy drives Nigerian political instability.

The West African country has been increasingly plagued by increased political instability tied to the government’s changing policy on fuel subsidies and bombings by the militant Muslim group Boko Haram. Now Nigeria appears to be dealing with increased piracy off its coast, where suspected Nigerian pirates have seized oil tankers and stormed drilling platforms. The Wall Street Journal reported in December 2012 that Nigeria has emerged as the new center for African piracy, rivaling Somalia; attacks off Nigeria’s coast jumped from 10 in 2011 to 27 in 2012.

The growing instability in Nigeria could contribute to higher energy prices globally. Nigeria is Africa’s largest crude oil producer (and fourth largest exporter of crude oil to the United States). The government aims to increase oil production from around 2 million barrels a day to 2.5 million barrels a day in 2013. But production could be halted by increased political instability driven in part by increased attacks from Boko Haram and piracy. Moreover, continued political instability could drive away foreign investment in the country’s energy sector. A report in December 2012 found that Nigeria could experience an estimated 40 percent decline in oil production by 2020 unless international energy companies sustain their investments in the country’s oil and gas sector.

5) Japan continues to walk back its nuclear phase out policy.

Japanese leaders began to walk back the government’s goal of phasing out nuclear power by 2040 just a week after officials declared the policy back in September 2012. Tokyo’s nuclear phase out policy has stirred concerns among businesses leaders and others worried that retreating from nuclear energy could hurt Japan’s economy over the long term. Indeed, Japan recorded a record trade deficit in 2012, linked in part to increased energy imports from the Middle East and elsewhere that are helping Japan compensate for the lack of electricity generation from nuclear power.

Economic and security concerns could give the Japanese government continued cover to walk back its nuclear phase out policy in 2013. In December, The Wall Street Journal reported that Tokyo could “reopen nuclear plants that pass stringent safety tests and consider allowing 40-year-old plants to remain open.” Watch for this policy to continue to take shape in 2013. It could have direct implications in U.S. LNG export policy given that Japan is a natural – and large – market for liquefied natural gas. Without that demand, the economic case for exporting LNG may be undermined, putting a greater onus on the U.S. government to begin conversations with the South Koreans, Singaporeans and other potential markets for U.S. energy.

The American energy revolution is starting to come into focus. Technological breakthroughs in shale gas and tight oil production are poised to make the United States — not Saudi Arabia — the world’s largest producer of crude oil as early as the end of the decade, according to the latest World Energy Outlook published by the International Energy Agency (IEA). The IEA’s analysis found that the United States could even be a net exporter of oil by 2035, a position the United States has not been in since the 1940s, when it had one of the world’s few developed oil industries.

At the same time, U.S. demand for crude oil is in decline and its crude oil imports are shrinking. Higher fuel efficiency standards in U.S. vehicles have contributed largely to depressed demand, with U.S. oil imports falling from 56 percent of total consumption to 46 percent between 2008 and the end of 2011, according to the U.S. Energy Information Agency. By 2035, the United States could be importing less than 2 million barrels a day, down from more than 8 million barrels today, according to the IEA. (Read More: Top 15 Sources for U.S. Crude Oil Imports in 2011)

The changing energy landscape is sure to pay dividends to the American economy. Increased domestic oil production could make a dent in the $460 billion a year U.S. consumers spend on foreign oil, shrinking the current account deficit and strengthening the dollar. At the same time, a glut in shale gas has contributed to cheap natural gas prices that are lowering energy bills for American businesses. Cheap electricity prices and more affordable petrochemicals that are derived from natural gas are together paving the way for re-shoring of some manufacturing jobs that moved abroad when trends were reversed.

But unlike the economic opportunities that are already manifesting, not much has been said yet about the national security and foreign policy implications of the American energy boom.

Part of the challenge comes from the fact that it is hard to assess the security implications when the future is anything but certain. Indeed, like with all forecasts, national security planners are right to view the IEA’s future scenarios with some skepticism, as it is difficult to project as far forward as 2035 with any meaningful amount of certainty. For example, some of the tight oil projects in the United States may depend on a global price of $70 a barrel in order to remain economically viable. Some analysts are projecting prices to fall as low as $50 a barrel, which could drive investors away from investing in projects that require $70 a barrel to break even, upsetting some of the oil production estimates.

Nevertheless, national security and foreign policy planners can make some reasonable assumptions about what the American energy revolution could mean for U.S. interests. If I was a national security planner, here’s how I would view America’s energy boom:

The U.S. Will Continue to Have a Stake in the Middle East

Despite the insistence by some that shale gas and tight oil production will usher America to energy independence, that goal remains elusive. Oil is perhaps the most fungible globally traded commodity, with the price per barrel set globally. It doesn’t matter if oil is produced in the United States or Saudi Arabia, consumers will generally pay the same price. Of course, there is a widening price gap between West Texas Intermediate and Brent crude oil – oil produced in Texas versus the European Atlantic – which onlookers should continue to watch. Nevertheless, despite the price gap, a geopolitical crisis in the Persian Gulf, Nigeria or elsewhere would affect global supply, and both WTI and Brent crude oil prices would be affected. The bottom line: U.S. oil prices still depend on what happens abroad. The United States will still have equity in the Middle East and an interest in preventing the kinds of geopolitical crises that can drive up global oil prices, which have implications for the United States and its allies.

Moreover, the U.S. energy boom could contribute to some longer term instability in the region’s traditional petroleum producing countries, and U.S. policymakers will need to remain watchful.

Although the IEA expects global oil prices to stay above $100 a barrel for the foreseeable future, it is not inconceivable for the opposite to come true. One can imagine a scenario where oil prices fall to $60 or $70 a barrel due to much greater tight oil production in America.  At those prices, some of the petro monarchies – from Saudi Arabia to Kuwait – would be in a pinch to raise the revenue needed to pay for social programs, like fuel subsidies. If those governments are forced to curb social spending, it could exacerbate some of the socioeconomic and political tensions that have contributed to revolutionary change across the Arab world recently.

Energy Trade Will Undergo a Fundamental Change in its Role in U.S. Foreign Policy

Energy trade has long been an element of U.S. foreign policy. One needs to only look to the Middle East, where cheap conventional oil from Saudi Arabia and elsewhere has been the cornerstone of America’s relationship with major oil producers in the region. But energy’s role in foreign policy will change as the United States becomes a major trader in oil and natural gas.

Perhaps the biggest opportunity will come from liquefied natural gas (LNG) exports, which could strengthen U.S. relationships with major energy consumers in East Asia. For example, as Japan moves away from nuclear power and increases its share of imports of oil and gas from the Persian Gulf, there is an opportunity for the United States to strengthen its strategic partnership with Japan by trading LNG. The caveat is that the United States needs to develop the physical infrastructure to export LNG, and amend the laws that only allow for LNG exports to free trade partners unless the Department of Energy approves an export license, which is done on a case-by-case basis. (Read More: Why Are Permits Needed for LNG Export Terminals?)

Energy trade could also be the most significant opportunity to foster greater cooperation with China. China shares many of the same energy vulnerabilities as the United States, particularly with respect to crude oil imports from the Middle East and North Africa. The United States could potentially become a reliable trader of LNG and, perhaps one day, oil, helping Beijing offset its strategic vulnerability in places like the Strait of Malacca. Such opportunities could fundamentally transform the U.S.-China relationship, and for the better. (Read More: How to Neutralize Energy Competition in the South China Sea)

The Shale Gas and Tight Oil Boom Will Make it More Difficult to Address Global Climate Change

The market may be pushing countries to double down on fossil fuels, making it more difficult to reduce global greenhouse gas emissions. The shale gas and tight oil boom is unlikely to stay isolated in the United States either. The market is calling, and the proliferation of the tools, techniques and infrastructure to produce shale gas and tight oil from Eastern Europe to East Asia will soon follow, along with the climate consequences.

The IEA concluded in its World Energy Outlook that unless there is a global effort to reduce greenhouse gas emissions soon, the existing energy infrastructure will lock-in 2⁰C by 2017; that’s the tipping point beyond which scientists project an increased frequency and severity of climate-related natural disasters, from hurricanes and typhoons to wildfires and drought.

While increased natural gas production could displace coal as the dominant feedstock in electricity generation in the United States and elsewhere, helping slow growth in carbon emissions, cheap natural gas prices may make it more difficult for cleaner, renewable energy production to compete in the market, nullifying the climate benefits that could accrue from natural gas. The New York Times reported in October that a Wisconsin nuclear power station may have been the first nuclear power station to be taken down by cheap electricity prices depressed by America’s natural gas glut. It could be a harbinger of things to come for the renewable energy sector, and may have a cascading affect on the ability for countries to reduce greenhouse gas emissions.

The global energy map is still unsettled, and there is a lot of uncertainty to be sure. But the security and foreign policy consequences are starting to take shape. It’s time to start planning accordingly.

High Stakes at Sea

The dispute is complex. States ringing the sea are becoming increasingly assertive in their claims, driven by concerns of nationalism, sovereignty, and even the need to stake claims to the region’s lucrative (but dwindling) fish stocks.  And then there are the potential petroleum resources. Estimates of the region’s energy potential ranges widely, according to the independent U.S. Energy Information Agency: U.S. estimates suggest the region could contain roughly 28 billion barrels of oil; while Chinese estimates are much more optimistic, projecting more than 200 billion barrels of oil beneath the sea.

Despite much uncertainty about the size of the region’s oil and natural gas resources, countries in the region are increasingly behaving as though access to those potential petroleum reserves is zero-sum — a winner take all and leave none for the loser approach — that is pitting countries against each other to tap into those resources first. Indeed, China, Vietnam and the Philippines are actively soliciting bids from petroleum companies to explore for oil and gas in contested waters, escalating tensions and reinforcing this zero-sum perspective. This continued competition is destabilizing and countries in the region need to take efforts to tilt the balance of behavior toward cooperation so that countries across the region can benefit from the sea’s potential resource wealth.

Opportunities for Regional Cooperation

There are practical steps that countries in the region can take to, as Secretary Clinton suggested, “literally calm the waters.”

First, the Association of South East Asian Nations, or ASEAN — the regional forum for addressing geopolitical and economic challenges — needs to play a more prominent role in neutralizing energy competition in the South China Sea.

One role that ASEAN should play is to help sculpt and enforce a renewed regional moratorium on deep sea drilling. This approach would, as Douglas H. Paal of the Carnegie Endowment for International Peace recently wrote, quite literally “remove the fuel from the flames of territorial disputes.” Indeed, a moratorium would help calm some of the concerns that states in the region have about needing to strike oil and gas first, and, more importantly, reduce the risk that countries inadvertently get drawn into conflict by condoning attacks against drilling platforms or other obstructionist activities incited by nationalists or others.

Second, with a moratorium in place, countries should work multilaterally to get a handle on how much petroleum actually lies beneath the seabed. The Asia-Pacific Economic Cooperation, or APEC, could help lead this effort. Since 1990, the APEC Energy Working Group has provided a forum for countries to address the region’s energy challenges, and it could lead the effort to develop common estimates.

Developing a common estimate of fossil fuel resources in the South China Sea would help reduce the tensions arising from countries conducting unilateral surveys that are currently underway. (These unilateral efforts seem to be interrupted anyway, with countries ramming each other’s survey boats or cutting survey cables.) If the petroleum estimates prove to be lower than many states expect — or indicate that extracting the resources would be too costly — countries may be less likely to aggressively pursue independent exploration.

China may reject this approach out of principle. But even if Beijing rejects cooperation through APEC, it would still be worth pursuing a multilateral estimate without China’s participation. Since any such estimate would likely be much lower than current Chinese estimates, the participating countries would have a common basis for contesting China’s claims, giving them greater diplomatic leverage. Furthermore, given China’s penchant for engaging states bilaterally, developing a shared multilateral estimate would provide states common ground from which to negotiate with China even on a bilateral basis, thus magnifying their bargaining power.

What is America’s Role?

The United States needs to strike a balance between reassuring its allies and partners in the region that it will help them safeguard their interests while also continuing to support a rules-based order in the Asia Pacific, one where institutions like ASEAN can play prominent roles in regional stability.

To do this, the United States needs to continue to articulate its interest in a peaceful resolution of the South China Sea dispute, and encourage countries to pursue policies that promote cooperation. But it also needs to make clear that the United States will not stand with countries that rely on threats or actual use of force to get their way, nor will the United States stand idle when such provocations threaten international peace.

Ultimately, though, America needs to make every effort to remain as neutral a party in this dispute if these regional approaches to neutralizing energy competition are going to be effective in reducing tensions. The options laid out above rely on credible and strong institutions that can assuage the fears of individual countries. For ASEAN and APEC to ascend to those roles as credible brokers, they cannot be overshadowed or weakened by America playing too strong a role. It is a delicate balancing act.

Last week, China began combat-ready patrols in the waters around the potentially resource rich Spratly Islands that both China and Vietnam have disputed claims to. And on Friday, China Daily reported that Beijing may develop a military presence in Sansha – a newly incorporated city located on one of the disputed Paracel Islands that was stood up to administer Chinese authority over the country’s South China Sea territories. (The city was established in response to a recent Vietnamese law that claimed sovereignty over the Paracel and Spratly Islands.)

The deployment of combat-ready patrols and discussions of developing forces at Sansha comes on the heels of an announcement from the China National Offshore Oil Company (CNOOC) that it will accept bits from foreign energy companies to explore and develop nine new blocs of the South China Sea that fall within Vietnam’s 200-nautcial mile Exclusive Economic Zone. (See the map here.) It is unlikely, though, that foreign energy companies will cooperate with CNOOC in these disputed blocs given the amount of risk the companies would have to assume in operating there. Regardless, Beijing is putting itself in a better position to protect its energy interests: “the announcement of these blocks reflects another step in China’s effort to strengthen its jurisdiction over these waters,” according to MIT Professor M. Taylor Fravel.

Making a Play for Resources

This recent activity joins a string of other incidents by China to protect its claims to the region’s potential hydrocarbon resources. Estimates of oil and natural gas in the South China Sea vary widely, from U.S. estimates of 28 billion barrels of oil to Chinese estimates of 213 billion barrels of oil. Yet no country knows what really lies beneath the seabed. Officials in Beijing appear to be placing bets that the South China Sea could turn out to be a “second Persian Gulf,” driving up strategic competition over potentially energy rich territory. But for years, efforts to conduct surveys to produce better measurements of the region’s resources have been impeded by Chinese vessels obstructing survey ships and others conducting seismic measurements.

China’s gamble in the South China Sea is in part driven by its strategic vulnerability over assured access to petroleum resources elsewhere. Approximately 80 percent of its imported petroleum comes from the Middle East and Africa, traveling through the narrow Strait of Malacca, a choke point wedged between Indonesia and Malaysia that carries risks of closure or disruption. Meanwhile, China’s vast infrastructure of overland energy pipelines from Central Asia carries risks, shipping petroleum across unstable transit states like Pakistan and Burma and delivering it to western China where Beijing’s influence is sometimes tenuous.  These vulnerabilities contribute to China’s assertive behavior in the South China Sea, where officials in Beijing appear to believe they can secure access to potentially large hydrocarbon reserves, even if China does not have internationally recognized claims to the region’s resources.

More Than Mere Symbolism

Although some see China’s recent activity as mostly symbolic, it is important not to underestimate the practical benefits that combat patrols and a PLA Navy station or some other military presence at Sansha could provide Beijing in the future.

In time, China may not need to cooperate with foreign energy companies to explore and develop blocs in the South China Sea, including the contested areas. To date, China’s offshore oil drilling activities have been encumbered by the lack of technological capability to drill in waters deeper than 300 meters. But that is changing: In May, CNOOC began operating its first-ever deep-water drilling rig that will allow China to drill to depths of between 10,000 and 12,000 meters, which may encourage unilateral drilling in contested areas of the South China Sea.

China’s technological breakthrough in deepwater offshore drilling (though still untested) could raise the stakes for other countries in the region worried that China will exploit the region’s resources first. This could potentially increase the number of attempts by others to obstruct offshore oil and natural gas drilling activities. China’s combat-ready patrols and other military assets could help protect those operations from sabotage, consolidating China’s control over South China Sea energy resources. In that light, China’s recent moves could be more practical than observers let on. And officials in Beijing may be planning for it.

1. Adapting to operational energy requirements and security challenges in Afghanistan and other combat theatres;
2. Hedging against future uncertainty in the global petroleum market.

Adapting to Operational Energy Challenges

Military leaders have become increasingly worried about operational energy challenges in Afghanistan and other theatres where U.S. soldiers, sailors and airmen are deployed and are working to reduce the demand for energy that must be transported across volatile terrain.

To date, part of the military’s effort to reduce operational energy requirements includes:

• prioritizing energy efficiency in the acquisitions process for new combat platforms;
• fielding micro-grid technology to more efficiently manage traditional power distribution systems that waste energy;
• replacing — where possible — diesel-fuelled generators with solar panels and other renewable energy sources;
• equipping soldiers with advanced batteries that stay charged longer to help keep them in the fight;
• and increasing awareness among all U.S. military personnel about energy use to help promote conservation practices.

There are clear operational advantages to reducing the fuel required by military personnel in theater. In particular, reducing fuel consumption also curbs the demand for petroleum that has to be trucked across dangerous territory where the fuel and the soldiers and contractors transporting it are vulnerable to insurgent attack.

According to a 2009 Army Environmental Policy Institute study, for every 24 fuel convoys deployed in Afghanistan, one U.S soldier is wounded or killed. Those casualty counts are even more striking in the aggregate: the most recent estimates from the Department of Defense found that between 2003 and 2007, more than 3,000 Army personnel and private contractors were wounded or killed by insurgents attacking fuel and water convoys in Iraq and Afghanistan.

And besides the need to reduce unnecessary causalities, curbing the amount of fuel that has to be transported into a combat zone can act as a force multiplier, enabling soldiers that would otherwise be guarding convoys to reenter the fight.

There are also financial advantages to reducing operational energy requirements that are becoming increasingly relevant in a fiscally constrained budget environment. In general, reducing total energy consumption can help insulate the Department of Defense from dramatic energy price spikes. The Department of Defense estimates that every $1 increase in a barrel of oil adds approximately $130 million to the military’s energy bill.

Moreover, fuel consumed in combat zones is by its nature more expensive due to the fully burdened cost of fuel — that is, the total cost from acquiring the fuel from a supplier to delivering it to troops at the tactical edge in countries like Afghanistan. The personnel and transportation costs of delivering fuel by jet, truck or helicopter add to the initial $2 a gallon cost of fuel. Although the fully burdened cost of fuel has been suggested by some to top $400 a gallon, the Marine Energy Assessment Team, or MEAT, offers a more conservative assessment. According to the findings from a 2009 visit to Afghanistan, DOD’s Defense Energy Support Center paid $2.19 per gallon for fuel. When the fuel was delivered to the operational level — a forward operating base — in Afghanistan, the price increased to $6.39 a gallon. The MEAT then estimated that it cost $11.70 per gallon at the tactical edge — for those military units deployed outside the wire, presumably at remote outposts.

The uniqueness of each war often makes it difficult for defense planners to develop lessons learned from one conflict and apply them directly to the next one — except when it comes to operational energy. The experiences of fueling the force during the wars in Iraq and Afghanistan have revealed a critical choke point that the U.S. military can address: the delivery of fuel to troops in combat. The Department of Defense is leading efforts today to reduce fuel requirements and — where possible — plug in renewable energy technologies in lieu of diesel generators and other systems requiring loads of fuel, enabling the U.S. military to be more effective war fighters by managing the risks of delivering fuel in conflict. At the end of the day it is about reducing the amount of petroleum needed to fuel the force.

Hedging Against Strategic Uncertainty in the Global Energy Market

On the other side of the military energy coin are the efforts underway at the Department of Defense to research, develop and test alternative fuels, such as algae-based biofuel, and by the Navy to cooperate with the Departments of Agriculture and Energy in public-private sector ventures to develop refineries and scale up commercially available biofuel. Although these efforts are related to the work being done by DOD officials to assuage operational energy concerns, the military’s broad investments in biofuels have a different goal in mind: preparing to fuel the force using non-petroleum fuels.

Critics charge military leaders and administration officials with promoting a green agenda — using war fighters to combat climate change instead of violent extremists. But that is not it at all. Although being environmentally sustainable and promoting security are not mutually exclusive, the investments in alternative energy are first and foremost about ensuring that U.S. soldiers, sailors and airmen have access to the fuel they need to conduct their operations and protect U.S. interests decades from now.

There is a lot of uncertainty in the future petroleum market that is stirring anxieties about assured access to energy. Although technological breakthroughs in hydraulic fracturing (or “fracking”), ultradeep water offshore oil drilling and other techniques are unlocking new petroleum reserves in the western hemisphere to augment Middle East reserves, demand for energy could still outpace supply by mid-century, largely as a result of demand from major developing economies like China, Brazil, India and Turkey. As a result, petroleum supplies could become increasingly tight.

The Department of Defense increasingly faces concerns about assured access to energy resources necessary to power the military. Major supply disruptions stemming from conflict in the Persian Gulf that could close (even if only temporarily) the Strait of Hormuz, or a natural disaster that takes U.S. domestic petroleum refineries offline pose major challenges for the U.S. military and its dependence on petroleum. And even though legislation gives the Department of Defense priority access to U.S. domestic petroleum reserves, some policymakers share concerns that a long-term disruption could exhaust those supplies and put at risk the U.S. military’s ability to conduct its missions.

U.S. military investments in alternative biofuels are driven largely by this uncertainty in the global petroleum market and the need to reduce reliance on petroleum, which provides nearly 80 percent of all DOD energy. Diversification is the aim of the game. While energy conservation and efficiency programs and electrification of non-combat vehicles help hedge against this uncertainty by reducing the overall demand for energy, liquid fuels remain the real albatross for the military. Purchasing, producing and testing advanced biofuels that can serve as a drop-in replacement to conventional gasoline decades from now help diversify the liquid fuel sources and reduce the vulnerability of being tethered to only one source of fuel. The emphasis on drop-in replacement fuels is important: DOD is procuring aircraft, ships and vehicles today that will be in service for many decades and, as such, new liquid fuels must be chemically equivalent to work in engines being designed today.

Although current biofuels are not cost competitive with petroleum, the Department of Defense cannot wait for a petroleum supply disruption before it tests and evaluates new fuels in its combat equipment. Making investments in advanced biofuels today will drive the development so that these fuels (if and when they are needed) are standardized for military use. This will help the U.S. military hedge against a future where petroleum resources may be scarcer, requiring the military to rely on drop-in replacements. While critics will argue against this plausible but seemingly remote future, the military must be prepared for a range of contingencies, especially high-threat but low-probability ones.

Finally, DOD’s motivation to invest in clean biofuels such as hydro-treated algae fuel versus dirty alternative fuels derived from coal-to-liquid technologies is in part a response to the changing regulatory environment in the United States and abroad that is demanding the use of less-carbon intensive energy sources. President Barack Obama issued an Executive Order in October 2009 that charged federal agencies to measure and reduce their greenhouse gas emissions, providing military leaders with guidance on renewable energy investments. Additionally, many U.S. states like California have instituted renewable energy regulations that compel compliance by the U.S. military active in those states. Moreover, foreign countries in Europe and elsewhere have increased their environmental standards, including regulations on greenhouse gas emissions from fuels. The Department of Defense must be prepared to adapt to these emerging environmental regulations in order to guarantee the U.S. military’s freedom of access to foreign ports and territories.

Conclusion

Defense officials and military leaders overseeing DOD energy programs are promoting two linked but distinct efforts to address energy concerns.

The operational energy challenges that the United States faces today in Afghanistan and other countries threatens both blood and treasure. Military investments in energy efficiency and conservation programs, including renewable technologies that can displace the demand for petroleum, will help logisticians adapt to the challenges of fueling the force in a combat zone by reducing the total energy requirement and managing more efficiently the energy the military does consume.

Finally, given the strategic uncertainty of the global petroleum market, defense officials are helping lead the effort to research, develop, test and evaluate advanced biofuels that can serve as a drop-in replacement to conventional fuels.

Continuing these efforts will help the Department of Defense ensure it its prepared to adapt to a future where petroleum resources are increasingly scarce (even if that scenario seems remote), and, more importantly, ensure that its platforms will operate just as well on drop-in fuels.

The Carter Doctrine and U.S. Energy Interests in the Middle East

The United States has had historical concerns about assured access to Middle East petroleum resources that have shaped U.S. involvement in the region. President Jimmy Carter famously declared in his 1980 State of the Union address that the United States reserved the right to use force to protect the flow of petroleum from the Middle East to the United States: “An attempt by any outside force to gain control of the Persian Gulf region will be regarded as an assault on the vital interests of the United States of America, and such an assault will be repelled by any means necessary, including military force.”

Although U.S. interests in the Middle East have become more complex since the Carter administration – to include concerns about violent extremism, human rights abuse and nuclear proliferation – it has become almost axiomatic to say that U.S. involvement in the Middle East has been tied solely to concerns about securing access to the region’s petroleum resources. Whether or not one buys that, the perception that U.S. interests in the Middle East are tied solely to concerns about energy supplies raises some questions about whether the United States will lose interest in the Middle East as it becomes less reliant on energy imports from the region.

In years past, U.S. dependence on petroleum imports (particularly in the Middle East) sharpened concerns about assured access to energy – that is, concerns that, despite the price of oil, U.S. contracts would be met so long as U.S. consumers were willing to pay the price. In 2005, U.S. dependence on oil imports peaked, accounting for more than 60 percent of total U.S. oil consumption, with about 25 percent of all U.S. oil coming from the Middle East. As a result, U.S. policymakers have had concerns about security developments in the Middle East that could affect oil shipments from the region and severely impact the U.S economy. A closure of the Persian Gulf’s strategic choke point, the Strait of Hormuz, or an attack by violent extremists or a hostile government on the region’s critical oil and natural gas infrastructure are among some of the scenarios that U.S. policymakers have been particularly concerned with.

The Changing Energy Landscape – New Production, New Suppliers

The United States is becoming less reliant on foreign oil imports, especially from the Middle East. In 2010, U.S. petroleum consumption was for the first time in many decades provided largely from domestic production. According to the U.S. Energy Information Agency (EIA), U.S. petroleum production from domestic resources of oil and natural gas satisfied approximately 51 percent of demand that year. Moreover, increased production of shale gas and offshore oil, as well as declining U.S. fuel consumption is expected to improve the balance between domestic production and foreign oil imports. For example, by 2025, the EIA estimates that the United States will satisfy more than 60 percent of its petroleum demand from domestic resources. Meanwhile, increased production of oil in the Americas (outside the United States) will gradually shrink America’s reliance on Middle East oil. For example, Canada, already America’s number one supplier of foreign oil, is expected to sharply increase production from tar sands that will provide additional volume for U.S. consumers.

These developments will have positive benefits for U.S. concerns about assured access to energy resources from the Middle East. New suppliers of foreign oil imports in the Americas are increasingly viewed as being less vulnerable to major supply disruptions and less likely to use their resources as leverage over the United States (except perhaps for Venezuela, which is no longer a significant exporter of oil to the United States).

Nevertheless, the United States will still have enduring interest in stability and security in the Middle East, especially with the region’s energy resources. Besides keeping a watchful eye on Syria’s uprising and Iran’s nuclear weapons program, the United States will have a stake in ensuring that the Middle East’s energy resources remain uninterrupted due to concerns that disruptions in oil shipments could drive up global energy prices.  This changing relationship with Middle East energy, in simple terms, is one of moving from concerns about assured access to the region’s petroleum resources to concerns about the region’s role in ensuring affordable petroleum.

Indeed, concerns about high oil prices, particularly their impact on gasoline prices, and the knock-on effects for the U.S. economy will give the United States a continued stake in the region. Gasoline accounts for approximately 66 percent of total U.S. oil consumption, tying gasoline and global oil prices closely together. Higher gasoline prices can stifle U.S. economic growth by diverting Americans’ spending toward transportation costs and away from other important sectors. And there is no simple fix to this challenge. Efforts to diversify gasoline mixtures have hit a plateau for the foreseeable future. Ethanol, for example, will likely continue to be blended up to 15 percent of gasoline mixtures but no more due to the corrosive effects that ethanol can have on U.S. pipeline infrastructure and automobile engines. Meanwhile, the market penetration of Natural Gas Liquid vehicles will likely remain stagnant given the infrastructure challenges associated with scaling up this technology. Of course, technological improvements in vehicle fuel efficiency will help reduce overall gasoline consumption, driving down concerns about gasoline prices over time – but even this shift will be slow.

Conclusion

Of course, America’s changing relationship with Middle East energy does present some opportunities for the United States. The shift from concerns about assured access to energy may allow the United States to reduce its role as the sole guarantor of security in the region, and increase its role as a partner to work by, with and through other countries to help them develop their capacity to provide for their own security and protect the region’s petroleum resources from disruptions. Although this may not seem like a significant shift in foreign policy, having a lighter footprint in the Middle East would allow the United States to be more nimble in an increasingly constrained fiscal environment.

The bottom line: America’s changing relationship with Middle East energy is important. But it is important not to oversell the foreign policy implications of this developing story. The United States has an outsized dependence on petroleum and until the United States makes significant efforts to diversify away from petroleum, America will have a stake in anything that affects the global petroleum market, including the Middle East.

I wanted to take the opportunity with this inaugural post to introduce myself and provide you — the reader — a brief sense of where I am coming from and what you can expect to see here on Choke Points.

First a little about myself. I am a national security and foreign policy analyst in Washington, working largely at the crossroads of science, technology and national security policy. My interests in technology and security policy has given me an opportunity to work on a broad range of issues — from cyber security to the impact of climate change on the U.S. Armed Forces. For the most part, though, my particular focus has been on natural resources and security (energy and climate change in particular), first at the Woodrow Wilson International Center for Scholars, and now at the Center for a New American Security (CNAS), a non-partisan national security and defense policy think tank.

It is worth noting too that although I have applied this functional research area to analyze resource issues in a few regions around the world (Africa and the Middle East, for example), you’ll notice from my writings that my particular regional focus is the Asia Pacific. My fascination with this region has been influenced largely by the year I spent living in Auckland, New Zealand where I was on exchange as an undergraduate student at the University of Auckland. Although New Zealand seems remote from the rest of the Asia Pacific (and it is), culturally the country is well connected with the rest of Asia, countering what would otherwise be a real feeling of isolationism from being so deep in the South Pacific. Moreover, the international affairs program at the University of Auckland keeps a finger on the pulse of everything going on in the Asia Pacific.

Finally, in my spare time you can either find me at Georgetown University, where I am deep into my masters program at the Walsh School of Foreign Service, in the stands at Nationals Stadium or plying the Mount Vernon Trail on my road bike.

National Security Implications of Resource Consumption

I hope that Choke Points will be a bit of a departure from the other commentary you are used to reading on Consumer Energy Report, specifically through my discussion of natural resources broadly and their connection to national security and foreign policy.

A disclaimer: the commentary you’ll read from me will almost never focus on domestic policy. Andrew, Robert and others have a comparative advantage in understanding and explaining the nuances of domestic policy much better than I can. To the extent that I focus on domestic policy, it will be through suggested policy recommendations that Congress should enact to enhance our national security and foreign policy agenda.

For more than three years at CNAS I have worked on what we call “Natural Security,” exploring the broad range of natural resource trends and how these trends interact with U.S. national security and foreign policy interests. One of the things you’ll notice in my posts is an effort to connect resource trends with each other and their implications for U.S. national security and foreign policy. You’ll see many mentions of water, strategic minerals, and fisheries, and how these resources may be directly or indirectly linked with energy and climate change issues.

Take for example some previous work I have done on the South China Sea where I have explored how China’s thirst for water in the Mekong Delta has contributed to uneasiness over energy resources in the South China Sea region. China’s unilateral dam construction on the Mekong River has exacerbated concerns among downstream neighbors (particularly Vietnam) that China will exploit the region’s natural resources with little regard for others’ concerns. Consequently, when it comes to the potentially hydrocarbon rich South China Sea, Vietnam and others cannot credibly believe that China won’t exploit offshore oil and natural gas reserves in contested waters given that its past record rings of resource nationalism. As a result, diplomacy becomes more difficult to craft, tilting the balance of action away from cooperation. This is a challenge for U.S. policymakers charged with diffusing tensions in the region. (Read more in “Chapter 5: The Role of Natural Resources in the South China Sea” in Cooperation From Strength: The United States, China and the South China Sea.)

Why “Choke Points?”

Finally, a note about the blog title: Choke Points. Yes, it is in part a play on some of my interests on maritime issues, like strategic energy choke points such as the Straits of Hormuz and Malacca. But more than that, it is a commentary on the state of thinking about natural resource issues in national security and foreign policy making. In the several years I have been working in Washington I have come to find that resource issues are a strategic choke point in our national security policymaking. We have come a long way, to be sure, but the U.S. government has not yet fully thought about how resource issues affect our broader range of national interests. In fact, in my experience resource issues only arise in security conversations on an ad hoc basis. We can do better. Natural resource issues — energy and climate change in particular — need to be more routinely integrated into the broad range of national security planning documents — from the National Security Strategy to the Guidance on the Employment of Forces (used by U.S. Geographic Combatant Commanders), as well as security planning exercises, such as war games and foresight exercises.

Resource issues can no longer be a choke point in our national security and foreign policy planning. Unless the U.S. government continually examines natural resource issues through a security and foreign policy lens, questions will be asked and go unanswered, with dangerous consequences for the country. Could water shortages undermine stability in Iraq? Could a severe natural disaster reverse Myanmar’s political progress? Could India’s foray into the South China Sea for energy resources provoke confrontation with China? These are the types of questions we need to be exploring; and it’s these issues I seek to raise here on Choke Points.

I look forward to your feedback along the way and hope this will be an interactive exchange. I by no means have all the answers and expect you the readers to help me better understand these complex issues where you can.