The temporary drop in crude oil prices which began some months ago is due to a combination of factors affecting supply and demand. However, the trend is rising to the point that there seems to be a greater prospect of a “third oil shock.”

1. Several factors currently moderate the rise in crude oil prices.




1. After strong variations, the crude « Brent » of the North Sea, which is the benchmark on cash markets, typically averages around 100 USD per barrel. It reached a low of less than 90 USD in late June, rising to 98 USD in early July.

   As in all markets governed by supply and demand, it is necessary to seek the cause for relative price decreases caused by these two key variables.

2. Basically, the current supply is abundant while the demand is sluggish.

   The sharp fall in output from Iran, the third largest producer (relating to sanctions), dropped from 2.5 to 1.5 million barrels/day. This was offset by an increase in production from Saudi Arabia, which reached record levels in the last thirty years, to 10 million barrels/day. Within OPEC, the Saudis have always played the role of equilibrium producer (« swing producer »). Thanks to their huge deposits, the Saudis are able to offset the supply deficit of one or more members, or even reduce their production in the event of a strong surplus.

   At this “delta” of production from Saudi Arabia, added production from Latin America (Colombia, Venezuela), the United States, Iraq and Libya (restarting after the phase of a crisis), and also production from Canadian oil sands, as well as production growth from natural gas liquids (about 0.5 million barrels/day), altogether help to relax the market.

   The demand for oil is stagnating and even decreasing slightly. This is explained by the significant slowdown in the global economy, particularly from the recession undergone by economies of major industrialized countries, along with a slowdown in expanding major emerging markets, thus reducing energy requirements. Since oil stocks have never been as important than they are today, especially in the United States, no « stock effect » will mitigate the direct impact of a more sluggish demand.

   Accordingly, the excess of world supply on the global average demand in 2012 is now estimated at 0.7-0.8 million barrels/day. The global supply is also expected to grow by 2.5 million barrels/day in 2012 compared to 2011.

   Fears about the situation in Iran, particularly those concerning the threat of a blockade on the Strait of Hormuz, where one third of oil is imported by sea, have subsided. As Iran and Algeria call for a future meeting, the position that will stop OPEC, in particular Saudi Arabia, remains to be known. Both these countries were hoping that the cartel would decide to lower production, and thus mechanically raise prices…

   At the same time, Ms. Van der Hoeven, executive director of the International Energy Agency (IEA) declared, at the Summit of oil and gas, that the price trend is “more uncertain than ever.” Markets overreact to any announcement or event considered significant: this can be observed during the decline in Chinese interrest rates, more recently with each new development of the Iranian issue, and also with oil companies as they have an objective interest in high prices. These prices also allow the companies to preserve their margins and cover development costs, which are driven up by technological challenges (new methods of drilling in deep water, as well as exploration for new energy sources) and also by taking environmental concerns into a greater account.

   Are we victims of an illusion? While Brent flexes, we are in an era of high oil prices, reflecting an overall market under tension.

2. The oil prices are permanently attached to a high point, thus certifying the prospect of a “third oil shock.”




The expression, “third oil shock,” is sometimes used to designate the period from 2001-2008 when Brent crude saw a monthly average from $16 to $126. As prices continue to stay above the $100 USD mark for more than a year now, a “third oil shock” is once again becoming a relevant issue.

Why is there a high level of prices with cash payments for future “commodities” markets?

1. Oil supply has been under pressure for a long time. In the central scenario of IEA, world oil production will reach 94.6 million barrels per day in 2035 (12.8 million more barrels/day than in 2010). On the other hand, demand is expected to reach 99 million barrels/day, thus creating a supply deficit of 2.6 million barrels/day. We can therefore expect heightened tensions in the oil market during the quarter century ahead. This scenario has been generally confirmed by the forecasts of majors, namely Exxon and Total, assuming a conventional oil production (Note: excluding natural gas condensates, as well as deep and ultra deep offshore). We can expect to see a stable or slightly declining supply over the coming decades. The decline in production from many ancient deposits must be offset by the exploitation of new deposits.

   In result of these tensions on supply, the increase in price level should logically allow for an increasing exploitation of resources, which have been previously considered “difficult.” This can be achieved thanks to improved recovery techniques (“enhanced oil recovery”), notably in the Middle East.
   The expansion of deepwater (500-1500 m) and ultra-deep water (beyond 1500 m) techniques will reach 10% of the total production of liquid hydrocarbons by these methods in 2025, according to Exxon.

   Unconventional oil also takes an increasingly important role in global production. Whether it is “tightoil” (oil shale found mainly in the Williston Basin) in the United States and Canada, oil from Canadian oil sands, or extra-heavy oil produced in Venezuela, all of these have seen a rapid progression.

   Depending on the price levels, the production of oil from gas or coal could expand significantly.

2. The components of demand are long-term dynamics

Global demand for oil continues to rise: most of this demand comes from the transportation sector (which is rapidly expanding in emerging markets) where the prospects of developing alternatives to oil are limited. In 2040, nearly 90% of transport will operate from hydrocarbons, compared to 95% today. Demand in the sector will increase by 45%, and transportation-related sales will increase to nearly 80% between 2010 and 2040.

Stabilizing demand for oil-related transport will essentially hold energy efficiency gains in traditional vehicles.

3. Although the prices will not decline, the extent of their increase is uncertain

No operator commits to forecasts beyond a few months

The political factors related to the situation in the Middle East contribute to the uncertainty.

Prices should not go below 80-100 USD. This level corresponds to the marginal operating cost of a barrel of oil as it becomes increasingly difficult to extract (thus this is a floor for operators). Furthermore, the budget analysis of major producing countries as well as OPEC members reveal a convergence around a price of 100 USD, a level intended to ensure a balance of public budgets. This has been stressed in the context of the “spring Arab” under social spending.

The extent of future increases remains difficult to assess. If the price floor is roughly identified, the band of price fluctuations is potentially large because:

• The price factor has a decisive impact on the supply: oil companies take this into effect when deciding whether or not to invest in a deposit based on oil prices expected for the period of operation (Note that it is thus necessary to distinguish the notion of deposit in the “geological” sense from the “economic” sense, depending on a break even point). This reasoning particularly concerns unconventional oil, with high production costs: bituminous shale and oil shale (50-110 USD per barrel), gas to liquids (40-110 USD), coal to liquids (60-110 USD). For ultra profond complex (Arctic etc) and Canadian oil shale, the $100 USD production costs are already exceeded.




• However, the impact of price on demand is very limited. Oil demand is price inelastic, primarily because transportation occupies a major part and their needs are incompressible. Additionally, because alternatives to hydrocarbons remain underdeveloped.




• A high risk of peak prices are in the years and decades to come.




• In any case, prices will remain very volatile, especially as a crisis in a producer country could cause a supply disruption. Their impact would be stronger than the reduced, spare production margins, currently around 3 million barrels/day. The impact of price speculation is the subject of intense debate, mainly because of transaction in forward markets and options markets.




• Only a strong and rapid surge in oil prices seems to justify the expression “oil shock.” According to Total, a $200 USD barrel would result in a substantial slowdown in growth. In this case, the bill on oil would exceed the maximum reached in 1980 (9% of global GDP compared to 8%). At this point, higher prices in the decade from 2000-2010 have not had as much of an effect on the overall economy as the first two oil shocks. This is particularly because the prices have risen more slowly.

Conclusion

Without certainty, the new oil shock crisis is looming, already raising critical issues for the future of peoples, states, businesses, and international relations.

In terms of supply, how can we respond to the exponential global demand related to both population growth and economic growth? How can we reconcile economic growth, driven mainly by emerging countries who make it their number one priority, with the climate issue? How can we achieve an “energy mix” to provide energy transition without going through a major shock? In other words, how could we gradually change our energy system while still being able to work at full capacity? Given the slow growth in industrialized countries along with the public financial crisis, how can extremely expensive investments to develop low-carbon energy and efficient energy for the climate issue be financed?

As observed by Christophe de Margerie, CEO of Total, we must make sure to enter in a new era of human history: an era for the “transformation of the energy system,” “smooth transition,” “complementary energy,” “research efficiency,” and “recognizing the need to reconcile energy demand with climate change.”

In any case, oil companies will have to profoundly renew their culture and project an image of corporate responsibility. They need to show change by putting their selves in the common space where the interests of economy, production, and public good come together.

In light of developments in emerging countries, particularly in China and India, a subject which has been widely reported, I would like to address a so-called US-China G2. The concept of G2 proposed a kind of co-piloting of world affairs by the current superpower, the United States, and the rising power, China.

I think we should separate the myth and reality within this issue by going over the realities G2 covers.

1. The reconciliation of the United States and China, reflected by the G2 concept, was, in many ways, inevitable.
   1. Several factors favor a relationship between the United States and China:
      • The Look East policy of the American administration is not new.
      • Within Asia, China is emerging as a new great world power.
      • The needs of China and the market it represents elicit a strong tropism of US companies.
      • The US debt is largely financed by the government of the People’s Republic of China.
      • Connivance appeared between Americans and Chinese on some major international issues: refer to the environment and climate which are a priority for both countries, and their international financial regulation, which ultimately converges on American “laissez-faire” and Chinese reluctance in dealing with problems attributed to the excesses of Western liberal capitalism.
      • The two countries also have a mutual perception that they need from one another. Both of the two countries are too big to be dominated, and both are too “special” to change radically. Furthermore, both countries need each other too much to allow themselves to be isolated from one another.
      • Overall, the United States and China see that their interests overlap in enough areas to give meaning to their growing partnership.

      
      

   2. These factors add to the logic of power:
      • The US is a superpower that has been seeking partners/rivals since the breakup of the Soviet bloc.
      • Power dislikes emptiness: thus the rise of China plays a part in an American “monopoly.”
      • Since the September 11, 2001 attacks, a change in American priorities was made towards fighting against terrorism. The attack on the twin towers led to closer cooperation between the two countries, expanding the scope of joint actions by Washington and Beijing. This led the two countries towards redefining a central role for China in regional and global affairs. The Chinese quest for a balanced partnership was no longer, under these conditions, an outrageous claim by a vulnerable country, but a fact which was increasingly supported by economic and financial capacity.
      • China sought the support of the United States to reach its current status: the rise to a status of great power through a close connection with Washington.
      • Both states sometimes have converging strategic interests and tend to recognize each other (“mirror effect” for great powers; against Russia, even India, and perhaps concerning Japan as well)
      • We can observe the US takes a part in a blocking capacity of certain Chinese speakers (ONG, G20).

   
   

2. Despite an approach movement of convergences, there hasn’t been any creation of a real US-China political territory where the two countries could share equal dominium. Why?

   I personally see three major reasons.

   1. First of all, because the bases of these two states and their world views are so different from one another, the United States and China do not have a common understanding of international order. There are several reasons for this:
      • The United States, as opposed to China, is a democratic power, steeped in the culture of law and committed to human rights. On some subjects, such as internal governance, their ultimate goals are simply incompatible. Neither power assumes that the other shares all of its objectives.
      • The United States ranges between isolationism, angel-ism, and interventionism. Whereas China adheres quite strictly to the defense and consolidation of its interest.
      • The US has an extroverted foreign policy. They do not hesitate, under certain principles and under the guardian role they feel invested in, to use military intervention outside their borders. However, the Chinese have a more introverted foreign policy, which is more prudent and under the seal of pacifism (at least in discourse).
      • The deployment of American power is global, but that of China is mainly regional, even though there’s an expanding trend in this area (refer to military presence and Chinese measures against piracy in Somalia).

      
      

   2. The widespread differences and conflicts of interest between China and the United States are other reasons why there are no current political territories for the two countries to exercise joint-sovereignty:
      • Differences in exchange rates and currency management (refer to discussions at the various G20 summits about the “framework for a strong, sustainable and balanced global growth).
      • Differences in the cause of trade imbalances (particularly in bilateral trade) and how they are addressed.
      • Differences in social order, the role of political parties, media, and the place of the individual in society etc.
      • Differences with certain crises (refer to crises with Iran, Syria and Tibet)
      • Conflicts of interest with access to certain markets, the openness of the two respective economies, and protection of intellectual property rights.
      • Ultimately: the likelihood of competition for access to natural resources (energy, minerals etc).

      
      

   3. And finally, because the other players in the international system wouldn’t want to hear of such a shared territory, which would resemble a large two-headed empire, there has not yet been a real US-China territory of joint-sovereignty.
      • This type of territory implies the absence of third powers and a shared desire to dominate a field of intervention without serious obstacles.
      • Yet the world of the 3rd millennium is increasingly poly-centric and uncontrollable
      • The European Union, the major emerging countries, and certain “irreducible” countries (Iran) also intend to influence the course of history.

   
   

3. What is the conclusion on the supposed G2?




1. In reality, two trends have emerged in opposite directions. On many respects, the relationship between the US and China has died down, moving in the direction of cooperation. At the same time however, deeply rooted differences in history and strategic directions have emerged. The economic and trade issues and the proliferation of weapons of mass destruction are two good examples.
• Non-proliferation in North Korea: for Americans, a rogue state must be punished; for China, North Korea is a potential ally towards re-balancing forces in Asia.
• In economic terms, there are two different concepts underlying the policies on monetary changes respective to both parties. For Washington, the low level of the yuan is treated as a manipulation in exchange rates, designed to favor Chinese companies and adversely affect US companies. For Beijing, a foreign exchange policy that supports domestic producers is not really an economic policy that the Chinese feel they need for political stability.




2. In total, the United States and China have more to discuss, to agree on, and to hear due to a combination of best interests, and a new league backed with responsibilities
   involving their status of “great power.” However, they will have difficulties truly harmonizing their positions on trade, currency policy, and politics to follow in certain crises and in respect of certain countries etc. Furthermore, they will have difficulties trying to put together the profound differences which characterize their political systems and social organizations. Thus, instead of a hastily announced political territory where the two countries would share equal dominium, we see the creation of a kind of “balance of terror on economic and monetary affairs” between Washington and Beijing (see article by Joseph Nye in “the great debate”).

   
   

3. To take note of these contradictory movements, extensive consultation procedures have been strengthened in January 2011. Dai Binggao, State Councillor in charge of foreign policy, is the principal architect of this new step relating to the Chinese. The key question in this case is to evolve from crisis management to the definition of common objectives, by moving towards the prevention of controversies with strategic resolution. Is it possible to achieve a partnership devoid of ulterior motives, to an international order based on cooperation? Can China and the United States develop true strategic trust? These questions will all become crucial issues throughout the next decade.

Le G2 américano-chinois

I would like to briefly share with you some views about consular protection within the European Union, particularly in the wake of the Lisbon treaty. It is not a core issue for today’s Dialogue, but I personally think that it is a good focus to understand where we are and where we could be.

My assessment will be quite practical, based on the experience collected in the Crisis management Department of the Quai d’Orsay.

I would like to recall the legal framework of European consular protection, firstly (I), then point out the state of play of our cooperation, both at central and local levels (II), and finally, try to identify ways to foster our cooperation in that field (III).

I-The legal framework of European consular protection has raised great expectations. But it still needs to be fleshed out.

Art 23 of the consolidated version of the Treaty on the Functioning of the European Union sets an ambitious target: Every citizen of the Union shall, in the territory of a third country in which the Member State of which he is a national is not represented, be entitled to protection by the diplomatic or consular authorities of any Member State, on the same conditions as the nationals of that State.

But up to there, consular cooperation did not materialize in the European positive law.
Two non binding guidelines shaped the pre-Lisbon state of play:

1. the guidelines concerning the consular protection of EU nationals in a third country, adopted by the Counsel in 2006. This document calls Member States to exchange information about:
   • the contingency, as well as evacuation plans, set up by their respective embassies;

   • the profile of their expatriate community;
   • the measures aiming at facing emergency situations (communication devices and survival kits) and the « travel advises » given to non resident nationals.
2. the guidelines concerning the « Lead State« , adopted by the Counsel in 2008 under French Presidency. Stemming from a British-French initiative, this document enables a Member State, on a voluntary basis, to take the lead of the local European coordination in a third country, in case of a major crisis including consular aspects.

A directive about consular protection is currently in a drafting process. It should be proposed early December 2011 by the Commission.

II-Consular protection of European citizens is a way to address some very practical issues and hence, to make the European Union closer to our people.

The issues at stake are real.

If I can sum up, three realities have to go together in the best possible manner.

• On the one hand, no need to stress that our world is increasingly free, diverse, and risky. The risks of natural and human origins are huge. And we discover, in the consular field as in many others, that asymmetrical threats are looming ahead everywhere.

• On the other hand, we have to bear in mind that about 30 millions of European citizens live permanently outside the European borders. Around 250 million of Europeans travelled abroad in 2010. So we have a significant exposure to the threats.
• In that regard, the diplomatic structures of the European Union are extremely heterogeneous, according to the various national traditions and capabilities. Actually, there are 107 countries in the world where only 10 EU member States have a diplomatic representation. A full fledge official presence of the 27 EU countries is established in only 3 countries – The United States, China and Russia.

Therefore, we have to take care of many people, in an unpredictable and risky world, with a diplomatic and consular network which is probably not enough wide and robust. So we do have a coverage problem, which requires undoubtedly practical steps forward at the EU level.

III-Having said that, seen from Paris, there seems to be a gap between the expectations and the current involvement of the EU in the field of consular protection.

While the legal framework is still to be fleshed out, the efficiency and ability to deliver of the European system in that field could probably be improved.

With due respect, there are six weak points at this stage, on which additional work is probably necessary.

1. First, the whole system still lacks clarity. So far, no clear or natural leading institution has emerged within the European coordination as a driving force. The role and added value of the EEAS is still to be established, as well as its interactions with the Commission and the Member States.

2. Second, at capital level, the added value of the EU machine is still questionable. For instance, the computer server « COOL » (i.e. « Consular cooperation on line ») links up, on a 24/7 basis, European crisis Centers to the EEAS crisis unit. It’s a positive achievement, which allows direct communication between Member States. It has a “facilitating” role. This is useful, but not really ambitious in terms of direct and tangible contribution to the response of the Member States.
3. Third, on the ground, the EU presence and response is loose or non existent in most of the cases. The European delegations are acting poorly in that field. First, they have scare resources at their disposal. Moreover – and that is a strong indicator – they occur to be included in the French contingency plan in more than 75% of the cases.
4. Four, as a result, in most of the third countries, there is no formal European cooperation to face consular emergencies. Informal exchanges of views are organised locally. The so-called “security meetings” gather all Embassies and the EU Delegation under the leadership of a Member State. But they do not really impact on our collective capabilities to handle a major crisis.
5. Five, the concept of Lead State, which is potentially a promising response to our global coverage problem, is not sufficiently defined and needs to be deepened. In our opinion, a Lead State is particularly relevant for a range of complex countries, with a limited number of European citizens and a limited number of embassies on the ground. It would not be sustainable otherwise. Therefore, a Lead State has been appointed for only 28 third countries. It was not the case in Lebanon, Georgia, Haiti, Libya, Japan or Ivory Coast, in short, for all the major consular crisis of the last few years.
6. Six, the burden sharing turns to be a key issue. Considering the budgetary situation, the burden is too heavy to be carried only by the most involved Member States. As far as France is concerned, we are already in the front line. We are Lead State in 13 countries, on a total number of 28, ahead of all other EU Member States. In Africa only, France is Lead State for 10 countries, representing almost 13.700 Europeans citizens. In comparison with the number of French citizens under protection, it’s an overcharge of 25%. All what can be done through the new EEAS and European Delegations will be much welcome!

IV-Despite those weaknesses, there is little doubt that a pooling of resources for consular protection is conceivable and under the current budget restrictions, probably inevitable.

It’s no coincidence that this clause of solidarity is listed under part II “Citizenship of the Union”. A EU visible action in the field of consular protection may help to link again the early purpose of the European project with the basic needs of the people.

For that purpose, the EEAS has to demonstrate its ability to meet the expectations of Member States and their people.

• Thinking forward, on the ground, maybe the European Delegations should replace the States which are not represented in the event of a consular crisis. In any case, they need to support the global effort of Member States, through a strong planning, prior to the crisis (eg census of the Europeans with no Embassy and stockpiling of the corresponding survival kits) and also through a real logistic support (survival kits, radio, means of transportation).

  Information sharing is not enough. If France, for instance, notifies that an aircraft is ready to take off with seats available for European citizens, the EEAS should be in a position to let it know to the other Europeans, and maybe also to take care of those without embassies up to the very door of the plane.

• In Brussels also, there are ways to achieve this kind of rationalisation. The consular crisis cell could be expanded and eventually granted projectable capacities, means and teams. The co-financing by the Europeans of the national means deployed might also be improved. The European mechanism for civil protection (EMCP) could also systematically be activated to address consular crisis trough the coordination, pulling and sharing of interoperable capabilities.

1. In a nutshell, security is a public good. It is the very mission of public institutions to deliver a protection to their citizens in a risky situation. The market will not do it.

2. The States, as you can see it everyday on TV screens, are confronted to a major “scissors effect”:
   • Their budgets are shrinking, and their staffs are constantly downsized;
   • The need for protection is escalating, in an increasingly adversarial and heterogeneous world.
3. There is room here for a robust and effective European to “fill the gap”:
   • there is room for enhanced coordination;
   • there is room for mechanisms to ensure a true “burden sharing”;
   • there is room for a “multiplier effect”, so that the sole means of the single Member States may be adequately complemented .

ESSEC Forum
Assessing the peacebuilding potential of CFSP and CDSP after the Lisbon Treaty
7 novembre 2011