Interview with Dr. Gal Luft of the Institute for the Analysis of Global Security:
China and US should set up a strategic dialogue on energy issues

Originally published by 21st Century Business Herald in Chinese (click here for Chinese version)
April 15, 2004.

The question is how much cheap oil do we have

Q. How much oil does the world currently use every day? How much is it likely to grow in the coming decade, and how long will known projected reserves last?

A. Well, nobody knows. We know what has been proven, but we don't know how much is undiscovered. And this is something nobody can tell, because nobody knows what hasn't been discovered yet. We have assessments, and assessments vary between 1 to 3 trillion barrels, depending on who you talk to. There are also what we call "unconventional oils," which is heavy oil and tar sands, which is a bit more difficult to recover and refine. So it depends on what you include in the calculations.

Q. In general, is there a consensus about how long known projected reserves will last?

A. There is a huge concern about that, because the question is not how much oil there is out there, the question is how much cheap oil there is out there. If oil gets too expensive, then it economically it won't be worth using it. The question is at what point we run out of cheap oil and the price of oil will climb to a level that it will not be economical to extract and produce and use it. There is a very fierce debate among geologists about when we will reach the point that they call "the peak." This is the point that you have depleted 50% of the global oil endowment, and after you reach this point of 50% the price never goes down. Some people say we are very close to peak, others say we are 20 years from peak, some even say we are 30 years from peak. But no matter who you talk to, in historical terms it will happen before the middle of this century. It's going to be quite soon; maybe not tomorrow, but in the foreseeable future we're going to reach peak.

Q. When you mention cheap oil, how much would you describe as cheap?

A. Cheap is within the range of $25-$35 a barrel; that would be relatively cheap. If it goes up to $40-50-60 a barrel, that would be much more difficult for people to afford and maintain the same way of life, and prices will go up because every product that buy and use has oil in it, and it takes oil to move goods from one place to another. So if the price of oil goes up, all other prices will go up too, and that will fuel inflation and unemployment and lots of economic problems throughout the world.

Q. What relationship should the oil consuming countries set up with the oil producing countries?

A. It depends on which countries. I think one of the problems is we see a political tension between oil producing countries and oil consuming countries. Primarily Muslim countries today control more than 70% of the world's oil. And as you know, the relations between America and the Muslim world are not good now. There is a clear tension between those who have the oil and those who need it, and unless these relations are improved it will create a lot of tension in the market in the years to come.

Q. To be more specific, what policies towards US-Saudi relations do you suggest the US should follow?

A. US-Saudi relations have seen better days. Ever since 9.11 there is a great deal of tension in the relationship because of Saudi involvement in terrorism and spreading radical Islam. American public opinion is very hostile to Saudi Arabia at the moment, because they feel the Saudis are not true allies. They are, on the one hand, tell us they are our friends, but on the other hand they send money to terrorist organizations and sponsor radical Islam and they create instability in various parts of the world, and now they also manipulate the oil prices because they are the leading force in OPEC. I think over time there will be an even bigger gap between the countries, and I fear if there is another terror attack in the United States by terror groups sponsored by Saudis, this will lead to a divorce.

China should avoid repeating America's mistake

Q. If you're afraid of China's energy needs adding to conflict in the Middle East, what policies toward OPEC and the Middle East oil countries do you suggest China should follow?

A. I think personally that China should do everything it can to avoid making the mistakes the US has made, which is to invest too much money in oil infrastructure. China is in a relatively good position, because it's not over-invested in oil. It's still making its first steps into industrialization, and it can leap-frog oil and move directly to the next sources of energy, instead of becoming dependent like the United States. I don't think there is a place for both China and the US in the oil market; in the long run, it's a recipe for disaster, and I think it will affect relations between China and the United States.

Q. When you mention examples like bio-fuels or coal-based fuels, you didn't mention nuclear power. What do you think of it?

A. I'm in favor of nuclear power, but most of the oil is used for transportation, not for power generation. The only way you can use nuclear power for transportation is if you move into electric vehicles and use electricity generated from nuclear power for the cars. I think that for China electric cars would be a very good solution, if they could get people to use electric cars and re-charge their cars overnight, when there is a low demand for electricity, then they will not have to increase capacity; they can use existing capacity; and it also will clean the air. I know a lot of cities suffer from a great deal of pollution, so electric cars could be one of the solutions China can adopt. The worst think for China to do is to become dependent on oil to the extent the US is today, because it will bring economic problems, it will pollute the air, it will force China to be more and more involved in the Middle East, and eventually it will put China and the United States on a collision course.

Q. What would you suggest our government do to make sure we don't go that way? If we want to cut down the production of cars, the car producers may not be happy.

A. No, I don't suggest to cut down the production of cars. I think it's only natural that people want to use cars. But you do want to do is to produce cars that do not run on gasoline. I'll give you an example. 80% of China is rural agricultural communities that produce rice. They produce a lot of agricultural waste - biomass - and they burn it. They burn the rice husks in the fields and that creates pollution. Now today you can convert that biomass into fuel, and this fuel can run in cars that are called "flexible fuel cars." They are cars that can run on any mixture of gasoline and alcohol, and I think China should look into this. The other thing is China has a lot of coal. China can use coal to produce methanol, to produce next-generation fuels from its coal. China, as I said, can use electricity and electric cars. So there are a lot things China can do based on its domestic resources, so it doesn't have to import as much oil. That requires an understanding that if they go down this path of buying more and more oil, that will bring a catastrophe to the world, because China is too big to enter this oil market. And then you also have India, which is also one billion people. China and India together is a third of humanity. I always like to say, if five Chinese demand the same amount of oil that one American does, we need to look for another planet.

Q. When we talk about China's peaceful rise, we need to look at the oil problem first?

A. Right, I think it should be a very high priority for China.

China and US should set up a strategic dialogue on energy issues

Q. But you also said that without substantial American technological support, we are likely to follow the path of the US. So from the US side, what can they do to help us?

A. I think the US on a political level should help China to move beyond oil, and help license technologies, so Chinese companies and the government can really promote these technologies in China. My thinking is that what needs to happen is the governments of China and US should embark on a strategic dialogue on energy, to sit down together and realize it will not benefit China or the US if China becomes a massive oil-importing country. I think it is in the interest of the US to help China leapfrog oil and move into next-generation fuels. China has its own industries and technologies, and they have done a lot of research and they've done some terrific things. But I think there has to be international cooperation, with the understanding that it's for the benefit of both countries.

Q. Have you heard that American officials have tried to discourage Chinese companies from participating in bids for Middle East gas and oil projects?

A. You mean in Iraq? That might be true. I think they also don't want other countries; they don't want the French, they don't want the Russians; they don't want anybody. Their position was that because they went and militarily invested all this money, they have the first priority to enjoy all the benefits. On the other hand, well, I don't see the American companies getting the oil from Iraq so fast. As you know, Iraq is a mess, and it's not clear that American companies will benefit from this. I think the lesson is clear: the less oil you have, the bigger the demand for oil, the stronger the competition, and that creates ground for tensions between countries. That's exactly emphasizing my point that you don't want a resource war, a competition over the remaining barrels of oil. The only way to prevent that is to begin to today to transition our economies into economies that are less dependent on oil.

Q. Do you have any extra points to our readers about following the energy industry?

A. I think in principle you have to look at what you can produce at home before you go and buy from other countries. The important thing to remember is there are more ways of moving people from one place to another, and you don't want to be in the situation that the entire society relies on one fuel. You want to create choice, and the way to energy security is to create choice. To create choice, we need to bring more fuels into the market and use technology. The government should encourage this and help those industries to gain strength and be able to compete with the oil companies, because this problem will not solve itself, and things will not get better, only get worse. We need to think if we want to pre-empt or if we want to wait till it's imposed on us. The most important thing to remember is that any transition, whatever you do, it will take about 20 years to transition your economy. You want to ask yourself if you want to start this 20-year process today, or in 10 years, or in 20 years, because if wait 20 years and only then start the transition process, then you have to wait 40 years before you see the results. What I'm saying is we need to start the transition today; we cannot afford to wait. If we do it today, then in 20 years we can be in a better place.
Property of The Institute for the Analysis of Global Security 2003, 2004. All rights reserved.