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32 Journal of South Asian and Middle Eastern Studies Vol. XXXVI, No.2, Winter 2012 Global Energy Market Outlook—An Assessment Gawdat Bahgat* For centuries energy has played a major role in the evolution of human civilizations. In the last two centuries fossil fuels (coal, oil, and natural gas) were crucial for the birth and development of the Industrial Revolution and global economic prosperity. Energy products are certain to maintain their character as the “engine” for maintaining and improving our way of life. A major characteristic of energy is the mismatch between resources and demand. Generally speaking, major consuming regions and nations (the United States, Europe, Japan, China, and India) do not hold adequate indigenous energy resources to meet their large and growing consumption. On the other hand, major producers (i.e., the Middle East, Russia, the Caspian Sea, and Africa) consume a small (albeit growing) proportion of their energy resources. This broad global mismatch between consumption and production has made energy products the world’s largest traded commodities. Almost every country in the world imports or exports a significant volume of energy products. This means the fluctuation of energy prices plays a key role in the balance of payments almost everywhere. The heavy reliance on energy in conjunction with the asymmetric global distribution of energy deposits has underscored the importance of energy security. There is a sense of vulnerability that is not new. Despite the abundance of energy resources and a favorable political & economic environment, industrialized countries started expressing their concerns over energy security as early as the first part of the twentieth century. First *Gawdat Bahgat, PhD, is Professor of National Security Affairs at the National Defense University’s Near East South Asian Center for Strategic Study. His areas of expertise include energy security, proliferation of weapons of mass destruction, counter-terrorism, ArabIsraeli conflict, North Africa, and American foreign policy in the Middle East. Before joining NESA in December 2009, he taught at different universities. Bahgat published eight books including Energy Security (2011), International Politcal Economy (2010), Proliferation of Nuclear Weapons in the Middle East (2007), Israel and the Persian Gulf (2006), and American Oil Diplomacy (2003). his work has been translated to several foreign languages. 33 Lord of the Admiralty Winston Churchill’s decision that the Royal Navy needed to convert from coal to oil in order to retain its dominance signaled a growing intensity of global competition over energy resources (mainly oil). The rivalry between global powers was played out in World War II when the Allies enjoyed access to significant oil deposits while Germany’s and Japan’s strategies to gain access to oil resources failed and led, among other developments, to their eventual defeat. The availability of cheap energy resources played a major role in the reconstruction and development of Europe and Japan in the aftermath of World War II. A prolonged era of relative confidence in the availability of abundant and secure energy resources came to an abrupt end following the outbreak of the 1973 Arab-Israeli War. Arab oil producing countries cut their production and imposed oil embargoes on the United States and a few other countries to force a change in their political support for Israel. This use of oil by major producers to gain political leverage has shattered the consumers’ sense of energy security. Since then, the fluctuation of energy prices (partly due to geopolitical developments and partly in response to supply and demand changes) has reinforced the sense of vulnerability. In the last few decades there has been a growing understanding of the challenges that climate change poses to life on earth. More people have come to an understanding that human activities contribute to and accelerates global warming and that something needs to be done to restrain human-made environmental deterioration. A slowly growing consensus has added a new dimension to energy security. The concept is no longer limited to the availability of energy resources at affordable prices. Environmental considerations restrain the exploration and development of these resources and urge consideration of less polluting alternative sources of energy. Energy Security The 1973-1974 oil embargo served as a turning point in global and domestic energy markets. The availability of...

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