United States: Energy in Flux: The 21st Century´s Greatest Challenge. What the shifting dynamics of energy mean for corporations, governments, society and the international community.

Joseph A. Stanislaw, Ph.D., independent senior adviser to the Energy & Resources practice of Deloitte & Touche USA LLP, has authored a white paper, Energy in Flux: The 21st Century’s Greatest Challenge.

Joseph's paper provides an in-depth, thought-provoking analysis of the shifting dynamics of global energy markets, and the potential implications for the energy industry, consumers and the international community. He analyzes the fundamental forces that will shape the energy industry and economies in the 21st century, including demographic shifts, emerging supply and demand centers, national approaches to greenhouse gas emissions, tensions over globalization, the role of fossil fuels and the potential promises of emerging energy technologies. The paper, attached below, offers an original and balanced point of view on the future of the energy industry.

Below is an excerpt from the paper.

Thirty-three years ago this autumn, a crisis in the Middle East sent the price of oil soaring overnight from $3 to $5 a barrel, and to $11 within three months. A gallon of gasoline, just 30 cents that summer, skyrocketed to $1.20. In the immediate aftermath of the Arab oil embargo, the Nixon administration took decisive action, extending Daylight Savings time, winning approval for the Trans-Alaskan pipeline, establishing automotive fuel standards—even banning gasoline sales on Sundays.

Three decades later, a new energy crisis—again marked by doubling oil prices and metastatic troubles in the Middle East—is upon us. But the backdrop against which it occurs is more volatile and unpredictable than in 1973.

Tectonic forces are roiling the global energy markets: China and India have emerged simultaneously both as mighty consumers and shrewd market players—they represent the new factor of "might and market" in global energy. Russia, meanwhile, is leading a wave of natural resource nationalism, while asserting itself politically by leveraging its formidable market presence.

The critical mass of human capital is also migrating: As Western expertise ages and fades, the former Soviet states and Asia are filling the gap. For the wide variety of technologies ranging from crude oil to nuclear power to fuel cells, the centers of technology, application, know-how, and human capital are progressively developing outside the United States (US).

But perhaps the most important change transpires almost without notice: The geography of energy is undergoing a radical shift. Whereas Saudi Arabia remains at the heart of production, the center of gravity has already begun to stretch north and east—the Saudi-Caspian-Siberia-Canada (SCSC) axis will drive the "energy of geopolitics" in the 21st century. The product mix has changed as well: The old "oil game" is becoming the "oil and gas game," and will become more of a "gas and oil game" before the next energy paradigm shift occurs.

Seized as an opportunity, this latest crisis could be the catalyst for a new era of market-driven innovation in alternative energy, conservation, sustainable development, and international cooperation. More than a generation has been lost during which the pursuit of these ideas has not been aggressive enough; we cannot afford to lose another. Two generations of talent and technology are needed to wean the global economy from oil, gas, and coal. One way or another, alternative and renewable sources eventually will come to reign. The question is whether fossil fuels can be expended wisely as a bridge to this emergent world, or whether the transition will be a tumultuous one—making us nostalgic for the good old days of $60 oil.

If this opportunity slips away the consequences could be dire. In the 1970s, the Arab oil embargo subverted price stability and sunk economic growth. That was bad enough. Now, however, by not heeding the hidden messages of $60+ oil, we place in jeopardy far more than economic growth: Global political harmony, the environment, the possibility of catastrophic climate change, and the promise of sustainable development all lie in the balance together—at the same time. And our collective ability to meet the basic needs of all the world's people is at stake.

Complicating the prospects for international energy cooperation are the conflicting perspectives of the major powers on the democratic movement. China and Russia have cast a wary eye on the pro-democracy agenda. The scuttling by Beijing of United Nations (UN) sanctions on Sudan in late April was just the latest flare-up. The fact that "democracy projects" are concentrated along the SCSC axis—from the Middle East through Central Asia—hides the potential of more danger. How far will the push toward democracy, free trade, and globalization progress, given the aggressive competition for energy supplies that lies ahead?

The "traditional" troubles in the Middle East remain. In addition, today there are the Iranian nuclear threat, an insurgency in Iraq, and the darkening shadow of extreme fundamentalism. And if all this were not sufficiently worrisome, Latin America, too, is in the grips of renewed nationalism and local activism.

The overriding challenge going forward is captured by a vastly expanded definition of "energy security." No longer does this simply mean security of supply. Energy security goes beyond this to encompass security in the political, environmental, infrastructure, and even terrorism senses, as well as the new concerns of sustainable development and climate change.

Many nations have taken the lead in shaping the 21st century energy picture: China and India are roaming the world to secure resources; Japan is the standard-bearer of applying new energy technologies; nuclear programs are blossoming on several continents; and the Kyoto Protocol has keyed innovation in smart technologies, solar power, wind turbines, clean coal, biofuel, and other energy frontiers. Distributed energy solutions might soon reach the far corners of the earth, empowering local communities and finally delivering essential services to the billions living on just a few dollars a day.

But for the world to arrive at this new energy era with the urgency demanded by the challenges we face—political, environmental, economic, and even social—the United States will have to take the lead. Since 1973, seven presidencies have come and gone, with mostly lip service being paid to reshaping energy demand through regulation and conservation, and spurring innovation in supply by offering incentives to the market. At the moment, a dozen states are the vanguard of creative policymaking; but rather than being a boon, this tangle of energy regulations has complicated corporate investment and development. Without delay, Washington needs to establish the "authorizing force" to define a brave new era of energy innovation.

Any effective solution will have to push on the supply side while pulling from the demand side. For too long in the US, new energy technologies and calls for increased efficiency have been dismissed as having too little potential, requiring too much time to implement, and costing too much. In effect, we were "pushing on a string." To create the needed realignment, consensus must first be forged that new technologies are needed—not just in the developing world, but also in the wealthiest of countries. In addition, nations must acknowledge that tensions exist amongst them; they must then create some form of international cooperation around these crucial issues and establish the policies necessary to "pull on the string" and move forward. The question Washington and the world's capitals should be asking is: What can we do to lessen the world's dependence on hydrocarbons while striving to realize these transformations?

On the new energy playing field, policy will set the boundaries, regulation will create the rules, government authorities will serve as the referees, and the market will determine prices, as well as the winners and losers in the game. In other words, we must allow a game to develop in which the markets will have the maximum play to determine which technologies succeed. The playing field must be set up in a way that allows carbon pricing to be a market force, thereby working toward carbon limitation and stabilization. And a fundamental dynamic in all this is that while the rules will change over time, it is essential to forge agreement among the referees and the players regarding the game itself.

Put simply, failure to act will place both the developed and developing world at great risk of serious economic, political, environmental, and social crises as conventional energy supplies become more scarce and competition for them turns fierce. The US, and indeed the world, cannot afford to wait another 30 years.

Joseph A. Stanislaw is independent senior advisor to Deloitte & Touche USA LLP’s Energy & Resources practice, and is the founder of the advisory firm The JAStanislaw Group, LLC, specializing in strategic thinking and investment in energy and technology. He serves as a member of several advisory boards for energy, technology and investment companies. Dr. Stanislaw was one of three founders of Cambridge Energy Research Associates in 1983 and served as managing director for all non-US activity until 1997, when he was named president, and later chief executive officer. Dr. Stanislaw is an adjunct professor in the Nicholas School of the Environment and Earth Sciences at Duke University, where he is a Member of the Board of Advisors for the Nicholas Institute for Environmental Policy Solutions. He was a Research Fellow of Clare Hall and lecturer in Economics at Cambridge University, where he was also a member of the Energy Research Group in the University's Cavendish Laboratory. At the University of Cambridge, he co-authored The Economics of Energy: Growth, Resources and Policies. He was a senior economist at the Organization of Economic Cooperation and Development’s International Energy Agency in Paris. Dr. Stanislaw is a co-author, with Daniel Yergin, of The Commanding Heights: The Battle for the World Economy. Now in the second edition, the book has been translated into 13 languages and made into a six-hour documentary on PBS. He is also the author or co-author of numerous reports and published papers on the future of the world economy, geopolitics, and energy.

Dr. Stanislaw received a B.A., cum laude, from Harvard College, a Ph.D. in Economics from the University of Edinburgh, and was awarded an M.A. from the University of Cambridge when he was elected a Research Fellow of Clare Hall. He is one of several people to have been awarded an Honorary Doctorate and Professorship from the Gubkin Russian State University of Oil and Gas.

Dr. Stanislaw can be reached at jstanislaw@deloitte.com.

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