On March 19, IWP professor Dr. Sara Vakhshouri had a discussion with Dr. Brian Murray, Duke University’s Energy Initiative director.
The first part of the discussion was dedicated to how energy markets react to supply and demand. Dr. Vakhshouri said that since the United States became a major energy producer, global energy markets have been much more responsive to changes in demand rather than changes in supply.
Part of this is because nations have been able to diversify their sources of oil and gas. Many parts of the world are producing energy now, so nations are able to purchase energy from multiple parts of the world, which has led to more supply stability. This, Dr. Vakhshouri said, is energy security. It is the ability to diversify where one’s energy comes from to ensure security from any threats to particular sectors.
Dr. Vakhshouri claimed that energy security began with the 1973 oil embargo. This crisis led to a push for energy independence in the United States (energy independence, she pointed out, is different from energy security), which meant that the U.S. would begin looking at alternative sources of energy and using untapped supplies within the U.S. These developments led to the United States exporting oil, which provided another supply for buyers. The diversification of supply has led to greater stability in the supply side of the market.
The perceived stability of oil supply has led to the market being more influenced by demand. Dr. Vakhshouri cited a few recent incidents to illustrate her point. Recent threats on the supply side of the market have caused very little change in oil prices, and these changes have been very short term. Last September, the attack of the Abqaiq oil facilities caused little change in oil prices. The same is true for threats to oil tankers in the Strait of Hormuz. The market knows that these threats can be remedied quickly, so prices are protected from them.
Demand, however, is a much more lasting threat to the market. Dr. Vakhshouri cited the coronavirus as an example. A large part of the recent plummeting of oil prices is the sudden drop in demand for oil as countries insulate themselves from the threat of the virus.
Dr. Vakhshouri and Dr. Murray also discussed how U.S.-China relations would be affected by U.S. energy production. Dr. Vakhshouri said that the United States and China are a “perfect marriage” with respect to energy. The United States is producing and exporting large quantities of oil and natural gas, while China is buying large quantities. China could use U.S. energy to diversify its energy sources, while the U.S. can tap a huge market. She believes that the trade war will eventually give way to a partnership between the two nations within the energy sector.
The last part of the discussion was dedicated to energy transitions and decarbonization. Dr. Vakhshouri pointed out that a large part of decarbonization still includes fossil fuels. Many nations are still largely dependent on coal and oil for their energy production, and decarbonization means transitioning to natural gas for them. There is no single renewable energy source that has proven its ability to replace fossil fuels. Countries such as India and China are increasing their use of natural gas significantly while relying less on other sources such as coal, oil, and biomass. This is the supply side of the equation; nations are also looking at the demand side. Some nations are trying to decrease or manage energy demand to control their carbon footprint. Dr. Vakhshouri used water as an example. Water desalination is extremely energy-intensive, so if a country can reduce its water usage, it can decrease its energy usage.
Dr. Vakhshouri closed by saying that there is no clear threat to fossil fuels. Many industries are still dependent on fossil fuels and have no clear alternative. She said that there is no clear alternative to jet fuel, so aircraft will be using fossil fuels for the foreseeable future. Petrochemicals are also still widely used and require fossil fuels. These sectors will keep using fossil fuels even if other sectors eventually move away.
Dr. Vakhsouri is the founder and president of SVB Energy International. SVB Energy International is a strategic energy consulting firm with offices in Washington, D.C. and Dubai. At IWP, Dr. Vakhshouri teaches a course on “Energy Security and the New Geopolitics of Energy.”
Duke University is a partner school of The Institute of World Politics, as IWP has a partnership agreement with Duke’s American Grand Strategy Program. Read more