The Foreign Service Journal, February 2009

a serious and sustained effort to shift the underlying en- ergy system. Although it is too soon to know the scope and duration of the current financial crisis and subsequent economic downturn, the most direct impact thus far has been a driv- ing down of demand and prices. Low prices affect the de- velopment of energy supplies (fossil fuels as well as renewables) and the shortage of capital delays projects. For technology-sensitive advancement, the financial crisis has (at least temporarily) dried up access to funding sources. Reduced revenue streams to conventional oil pro- ducers as a consequence of lower prices may make them rethink nationalistic policies in order to attract new invest- ment dollars and investors. With respect to the effect on the climate, reduced en- ergy demand may slow emissions growth, but not any- where near the levels needed. Lower prices undermine and delay technology investments and switching to alter- natives, but they may also reduce the cost of building new clean-energy infrastructure as prices for steel, labor and infrastructure also decline. Despite the uncertain long- term impact of the current economic crisis, most analysts agree that the underlying trends of the last several years will persist. In any case, it is already clear that our current path is unsustainable. Transitioning away from the current sys- tem, however, will require massive investments, significant technological advancement, major changes in government policy and commercial activity, changes in public behav- ior, significant amounts of basic materials and human cap- ital and unprecedented global cooperation. A trans- formation of this magnitude normally unfolds over many decades. But the reality is that these changes must take place over a much shorter timeframe and at a potentially sizable cost to society. Despite the daunting nature of this challenge, the right strategic approach can also yield sig- nificant economic and political gains. A Strategic Opportunity The United States is an important and influential part of the global energy market. It is by far the largest consumer, accounting for 23 percent of global energy consumption. Currently, the United States accounts for 25 percent of an- nual world liquids consumption, 20 percent of world coal consumption and 22 percent of global natural gas con- sumption. At the same time, the U.S. is also an important supplier of energy. It is the third-largest producer of oil, second-largest producer of natural gas and the largest pro- ducer of ethanol (closely followed by Brazil), and has the world’s largest coal reserves. Despite this important role, the U.S. is increasingly disadvantaged by the emerging energy trends of the last several years, and our influence over how other countries act in the face of these trends is diminishing. Leverage is being redistributed to major resource holders, the com- panies representing them and major new consumers. In many ways, these new players are not beholden to the market-based principles that the United States and many other traditional consumer countries have put forth as a global model for energy production, trade and use. Moreover, many of the factors that underpin our en- ergy security, contribute to global stability and give us in- fluence to shape global energy activity are no longer as effective. Domestic production of oil and natural gas is flat or declining, and the resources that are available are more carbon-intensive. Spare capacity is not as abundant rela- tive to global demand as it once was. International oil com- panies face increasing obstacles to investment. Western notions of free-market systems are increasingly under at- tack. And many of the post–World War II institutions de- signed to deal with global multilateral issues reflect the interests of the world as it once was, not those of today’s major new players. Given the increasingly tenuous outlook for global en- ergy markets and our standing within those markets, the best strategic option for the United States is to try and take a leading role to influence the rules governing the way ahead. This strategy is not without risks or cost, nor will it be easy to execute. The emergence of a carbon-constrained world can bring about economic opportunity and job cre- ation for some, but it will also increase the cost of energy and, as is true of any major economic transition, cause some degree of dislocation. Despite the widespread rhet- oric about a green recovery program, it is far from clear that the American public and U.S. policymakers are will- ing to make the sacrifices and changes that will be required to address these challenges. Climate change can be an opportunity to breathe new life into outdated views on trade, agriculture and foreign policy—or it could exacerbate those issues and create new levels of complexity (for difficult issues like agricultural subsidies, border tariff adjustments and geopolitics). Con- structively engaging the rest of the world on climate change 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 23 F O C U S