The Foreign Service Journal, February 2009

F E B R U A R Y 2 0 0 9 / F O R E I G N S E R V I C E J O U R N A L 17 on drilling in environmentally sensi- tive areas. But Senator John McCain turned that issue over to his running mate, Alaska Governor Sarah Palin, who removed any ambiguity from the Republican Party’s aggressive up- stream stance on oil and gas with her slogan of “Drill, baby, drill!” The 47 percent of the electorate who voted for the Republican ticket cannot be ignored. On the issue of constraining greenhouse gas emissions, both Senator Obama and Senator McCain took a position in favor of “cap and trade” (putting a limit on national car- bon emissions and trading carbon emissions permits under that limit), signaling the likelihood of a significantly different U.S. approach to climate change policy than George W. Bush pursued. When oil prices were spiking last summer, both candidates broached the idea of using the Strategic Petroleum Reserve to stabilize the market, but advisers to both campaigns quashed such talk. In any case, unlike his opponent, Obama did not paint himself into any inescapable political corners on energy issues. The Oil Price Roller Coaster Pres. Obama’s team will discover an energy market in sharp readjustment and under considerable stress. Oil prices fell by two-thirds from July to November 2008, both as an overdue reaction to sustained exaggerated prices and because of the sharp contraction in energy de- mand driven by the global economic slowdown. As of this writing in early January, the bottom of the economic ad- justment has not been reached. Oil prices are now well below the marginal cost of new production in many areas, such as the Gulf of Mexico and Canadian tar sands. This price adjustment has many implications. Consumers with cars and homes have gotten immediate relief at the gas pump or when fill- ing their home heating-oil tanks. Falling energy prices will eventually feed through the economy in the form of lower prices for manufac- tured goods. For more economically fragile consumers (two-thirds of humanity), lower energy-input prices for fertilizers, insecticides and transport should reduce food costs. In addition, the crushing weight of subsidies around the world, measured at $310 billion in 2007 by the International Energy Agency, will be eased, freeing up resources for health, ed- ucation and transport infrastructure. Those oil-producing countries who had the wisdom to direct the past years of windfalls into sovereign wealth funds will not feel as dramatic a budget shock as will less cautious governments. Many producers resisted the temptation of higher prices and continued to budget for oil prices below $50 a barrel in their annual revenue as- sumptions, while others need prices to stay above that mark to meet spending commitments. Countries whose spending expanded to the limits of the windfall will ex- perience considerable difficulty in getting back to living within their means. Some of their leaders may find their ability to placate their citizens’ inflated expectations se- verely hampered. In the marketplace, investors in upstream oil and gas will need to evaluate whether oil at $50/barrel is transient — and, if so, whether it will return to the $60-to- $80/barrel range or drop further. Their conclusion will affect the volume and pace of investment, which will, in turn, determine whether there will be enough oil and gas when demand picks up. (There is no real doubt that global demand will eventually resume its long-term growth pattern — only when, and how much lower will it go first?) The IEA is already warning that by 2010 or 2011, we could see the onset of another cycle of tight sup- ply and high prices because of insufficient investment now. Disturbing signals are already coming from both ends of the energy spectrum. In Saudi Arabia, Aramco has slowed the pace of development of incremental produc- tion fromManifa, currently 900,000 barrels a day. And in F O C U S Disturbing signals are already coming from the supply and demand ends of the energy spectrum. WilliamC. Ramsay, a Foreign Service officer from 1971 to 1998, served as ambassador to the Republic of the Congo (Brazzaville) from 1993 to 1996 and as deputy assistant secretary of State for energy, commodities and agriculture trade from 1989 to 1993 and again from 1996 to 1998 (when his portfolio included foreign policy sanctions in- stead of agricultural trade). After leaving the Foreign Serv- ice, he was deputy executive director of the International Energy Agency for a decade. In 2008 he was named a sen- ior fellow and director of the energy program at the Insti- tut Francais de Relations Internationales.