Introduction

There seems to be a natural tendency for human beings to believe that theirs is a particularly important or decisive time in history. This perennial belief can’t always be right, but after the events of the past month it does seem possible that the start of the 21st century marks a genuine turning point.

An economic outlook that was already uncertain has become far more clouded with the outbreak of war. The intense concerns about the possibility of global recession mean the decisions taken – or ducked – at the ministerial meeting of the World Trade Organization due to take place next month are even more crucial.

Whether the meeting goes ahead in Doha or some place else, the outcome of the negotiations now will prove decisive for the multilateral trading system and for prospects for any companies engaged in trade and investment across borders. The chances of an agreement are probably the best they have been since the protests erupted at the WTO meeting in Seattle two years ago. This is thanks in large part to the decisive response of the negotiators on both sides of the Atlantic since the attacks on the US.

Yet it is hard to feel completely optimistic about the chances of an agreement on the launch of a new trade round when on top of the outbreak of war, and on top of the normal tensions between the interests of member countries, the negotiations are also taking place against the backdrop of increasingly vociferous protests and arguments against the very ideal of free trade.

The challenge of globalisation for the energy sector

The energy business is thrust into the forefront of this conflict not least because it is so demonized by some of the campaigners. It is already a highly globalized industry, and therefore one with a lot at stake when it comes to the framework of trade and investment rules.

Energy plays an absolutely fundamental role in economic development. Per capita energy use is highly correlated with levels of GDP or wider measures of living standards. Economic growth in all parts of the world, rich and poor alike, means the demand for energy will continue to grow.

The key challenge for the industry therefore will be meeting the energy consumption needs of 6bn people, 7bn within another decade.

A conservative forecast puts the demand for oil at 90 mbd by 2010, up from 77 mbd now, and for natural gas at 280 bcf/d up from 220 a day today. Oil and gas supply almost two-thirds of the world’s energy needs currently, and that share will increase.

The shift towards gas within that total, containing as it does 24% less carbon than oil, is also going to continue in the short-term. Gas is well on the way to becoming a globally-traded fuel no longer reliant on extensive pipeline networks, thanks in large part to technical innovations which have changed the economics of natural gas transportation. Gas now accounts for 40% of BP’s daily production, up from 15% a decade ago. Needless to say this strategic choice to expand in gas production has been motivated by our belief in the future of gas as a fuel of the future.

The longer-term need to diversify the sources of energy supply beyond the hydrocarbons is of course driving substantial technical innovation in the industry. BP has one of the largest solar power businesses in the world, having invested $200m in photovoltaics in the past five years. It’s a business that’s growing at 30% a year. But the time frame for renewables like solar power or hydrogen fuel cells becoming significant contributors to world energy supply is 30 or 40 years.

The potential increase in demand for energy, and therefore emissions, by rapidly-growing developing countries is something that causes a good deal of concern, not only to ardent environmental campaigners but also the thinking public. What kind of world will it be when China is as highly industrialised and energy-intensive as the rich economies, they ask?

Yet there have been great gains in energy efficiency. For every 1% increase in world GDP, total energy consumption rises by 0.4% – an average which covers a range from a 0.5% increase in US demand to a 0.1% increase in Chinese demand.

This highlights a pretty basic point. The key challenge for the energy industry in meeting growing demand is not one of limited resources, with currently known reserves amounting to 40 years-worth of oil supply at current rates of extraction, and 60 years of gas.

The challenge is, rather, using them wisely. Matching the supply of resources to the demand in different markets will depend more than ever on cross-border access and investment. This in turn will rely on the evolution of the multilateral trade system.

Technological advance will continue to play an important part, of course. Multinational companies like BP and others in this industry are exactly the means by which ideas and technical know-how, if backed by sensible protection of intellectual property rights, can cross borders. International corporations are the only organizations able to spread best practice around the globe.

This process offers a good deal of scope for energy-efficient growth in countries where demand is growing rapidly. It is a common mistake to insist that there is an inevitable and fixed trade-off between economic growth and a clean environment. For even in the short-term the use of clean fuels and the continuing switch to natural gas are improving the terms of this equation. So too is the reduction of emissions by industry. BP itself will have reduced its emissions by 10% between 1990 and 2010.

Hunting for further improvements, and beyond that diversifying into alternative sources of supply, is one of the focal points for technical advances in the energy industry.

The other is the constant hunt for greater efficiency. And in this we’ve seen extraordinary developments in recent years, whether it’s deep-water drilling, the discovery of previously unknowable reserves through more intensive processing of seismic data, or the use of ‘intelligent wells’ in hostile environments. The cost of finding and developing a barrel of oil has fallen from $6-8 in the 1980s to under $4.

While it would be naive to think there are technical fixes to every problem, it is a greater mistake to argue that economic growth comes at too high a cost because it implies increased energy demand. This is not just because it incorrectly assumes the relationship between growth and energy demand, or energy use and environmental impact, is immutable, but also because it is unrealistic and morally doubtful.

Unrealistic and unfair because it implies that rich countries should pull up the rope ladder of economic development behind them and make it impossible for poor countries to climb up. Many politicians in developing countries have pointed out forcefully that this is simply unacceptable. Some of the darker green campaigners would of course like to see the developed countries slash their own energy use too, but theirs is a romantic harking back to pre-industrial times that’s unlikely to prove too popular with the majority of citizens.

The importance of trade and investment

Technological and economic change are continuing to drive forward the process of globalization. Yet at the same time the process is subject to an increasingly vociferous political challenge. The system of multilateral free trade which has delivered such great benefits to so many people in the post-war era needs defending vigorously as never before.

In 1824, Lord Macaulay famously remarked that “free trade, one of the greatest blessings which a government can confer on a people, is in almost every country unpopular.” He was referring to the vested interests in industry, the familiar protectionist pleas from specific producer groups, which are inevitably more focussed and politically influential than the general consumer interest.

More serious now perhaps is the loose but loud coalition of campaigners and protesters whose opposition to globalisation has captured the news agenda and made a significant impression on public opinion. It would be a mistake to dismiss this movement as a collection of Luddite anti-democrats, although this might indeed be a fair characterisation of some of its protagonists.

Others, however, are well-meaning and even idealistic people. There is a lot to welcome in their concern for what happens to the less fortunate in other parts of the world, in the development of a new internationalism based on the understanding that the problems of poverty and under-development are not only problems for the poor but for the rich too.

Unfortunately many activists been sold on the idea that trade is bad for the poor when that is the absolute reverse of the truth. This is a highly damaging misperception – and most damaging for those who have least now because they’re the ones with most to gain.

However, it is essential to respond to the concerns underlying these damaging beliefs. For two reasons. First, because all international meetings now have to take place behind a barrier of razor wire and armed police, with an escalating degree of violence each time. This is an intolerable state of affairs for any believer in democracy and may damage the essential tools for advancing interdependence. Secondly, because the concerns deserve and need to be addressed.

Developing countries can rightly claim that the implementation of past trade agreements has not served them as well as it might. The high level of protection still afforded agriculture and textiles, for instance, has created an understandable legacy of scepticism. While their counterparts in developed countries have to tackle thorny political obstacles in agricultural reform, for instance, politicians in developing countries have the even more pressing imperatives of poverty and starvation.

Benefits of globalization

For this reason significant economic growth in the developing world is a political and moral imperative. It is essential for the reduction of poverty and improvement of health and life expectancy. It is worth setting out in this context the benefits of globalization. It is after all a case that might well need making again and again in the months ahead.

Is there any truth in the charges levied against globalization by the protagonists of the backlash? Has globalization failed to live up to its promises?

Not at all. There have been demonstrable and even quantifiable gains to the poor as well as the rich from the increasingly free flows of goods and services, capital and labour. There are immediate economic gains. And also less tangible and longer term gains as the result of an outward orientation which encourages political and institutional reform. This can create a virtuous cycle of greater scope for economic and political development, improved gains from free trade and investment and further openness.

Participation in global trade has significantly narrowed income inequalities between countries, in both globalization now and a century ago. To the extent that world inequality has increased it is because those countries not participating have fallen further behind. In fact in the past few years because of the increased openness of China and India the global distribution of income between countries has become less unequal. There has been a lot of catching up since 1975, but only in the relatively open countries.

The evidence over the past quarter century is that incomes in the poorest fifth of the population have matched the average increase in incomes in almost every country. Trade and growth benefit not only the rich but the poor too, and thereby make a powerful contribution to the reduction of poverty, contrary to another of the current myths. Of course some groups of people, some well-off, others not, do lose out. But the great majority benefit.

The evidence comes from some cross-country studies and also more detailed research in particular countries. For example in China the gap between low rural and higher urban incomes has narrowed more in the regions with greatest access to international trade. It is by now adding up to an impressive body of evidence on the widespread benefits of trade.

The proportion of the world’s population living in absolute poverty, less than a dollar a day, has also shrunk, although the increase in total population has meant an increase in absolute terms. The figure is now 1.2 billion people, or a fifth of the world’s population.

It is true that the rich in developing countries have sometimes gained the most to start with from freer trade and investment, but any initial widening in the income distribution is over time reversed. This is a well-documented phenomenon.

It’s true, too, that the laws, institutions and politics of each country affect the scope for gains from trade. Globalization in itself is not enough. And perhaps technocrats have too often overlooked the importance of the institutional realities in advocating liberalization. To take just one example, the legal tradition has strong explanatory power for economic development, after taking account of other influences. The British tradition, with stronger protection of the rights of creditors and minority stockholders, has been more favourable than the Napoleonic. In general economic efficiency is highly dependent on the quality of the legal and political environment.

Even something as apparently value-free as technology actually has a vastly different economic impact depending on the social context. There is no mystery about a technology like the generation and distribution of electricity. But consumption in kilowatt-hours per capita in India is only a tenth the level in countries like Greece and Slovakia, and little more than a twentieth of the level of consumption in Japan. A third of the world’s population, about 2 billion people, have no access to electricity.

Technology diffuses at hugely variable rates within countries too. For example, India combines one of the world’s leading high-technology hubs in Bangalore, and the seventh largest number of engineers and scientists in the world, with an average of only five years of schooling and 44% adult illiteracy.

Nevertheless the diffusion of technology is one of the most important consequences of international trade and investment. John Stuart Mill highlighted this channel, the flow of information embodied in goods or factories, as being more important than the direct economic gains.

In Principles of Political Economy, Mill wrote that “…the economical advantages of commerce are surpassed in importance by those of its effects, which are intellectual and moral. …… …There is no nation which does not need to borrow from others, not merely particular arts or practices, but essential points of character in which its own type is inferior.”

Beyond the evidence demonstrating the practical gains from trade, there is above all a moral case. Many of the classical economists including Adam Smith, argued that the expansion of trade promoted individual freedom. Smith called it the “least observed advantage of commerce”.

More recently the Nobel prize-winner Amartya Sen has emphasised economic development based on international openness as the embodiment of freedom, as a vehicle for enhancing human choices and capacities.

There is a lot at stake here in safeguarding the gains from trade and liberalisation. That they need defending when there is such a substantial body of evidence concerning their benefits demonstrates the political and economic challenges posed by globalization. Businesses are thereby being drawn into increasingly controversial territory.

Big international companies like BP are sometimes criticised for being over-mighty and unaccountable, exercising undue and anti-democratic influence over governments. The charge wildly over-estimates the power of businesses. What’s more, we are very well aware of the scope of our legitimacy and have no desire to replace governments or any democratic political institutions. The relationship between an international company and government is vital but it is one of discovering mutual interests, and ensuring governments can deliver economic benefits to their people.

Indeed it is the anti-democratic flavour of the protest movement itself that runs the risk of damaging the people it claims to want to help.

A noticeable aspect of the protests is the opposition to technology per se as well as trade and liberalization. Campaigners have made some headway, for example, in getting politicians to sign up to the so-called “precautionary principle”. But if this approach, which could be summarized as ‘ban first, think later’, were widely adopted it could slam the brakes on progress in some technologies.

Yet technology has been one of the most powerful forces for economic development, an important message for the ever more high-tech energy industry. Depending on the time period and country involved, technical progress has consistently accounted for a half to two-thirds of improvements in measured growth, which itself underestimates improvements in living standards.

A recent United Nations report, courting a measure of controversy with activists, set out the variety of ways in which technology can advance human development. Technology is estimated to have accounted for up to a half of the reduction in mortality achieved in developing countries between 1960 and 1990. One powerful example of such progress through a medical technology is oral rehydration therapy. Similarly, technology has accelerated food production and boosted crop yields. This has played an important part in reducing under nutrition in South Asia since the 1970s, and new plant technologies hold a similar promise now.

The UN report pointed out that technological gains are not one-time affairs, either. They create a virtuous cycle of improved knowledge, better health, higher productivity, faster income growth and greater capacity for future innovation and knowledge.

Foreign investors provide one of the most direct means of introducing new technologies. Much overseas investment is carried out by big companies at the cutting-edge of innovation. Even in OECD countries the plants opened by inward investors record much higher than average levels of productivity, in large part because of the use of the best technology and equipment. This is all the more true for developing countries. Any arguments that once applied about the merits of safeguarding domestic producers, for the sake of creating national champions or nourishing an ‘infant industry’, have no validity at all in an economy where growth depends on ideas and information.

We do need to be humble about our ability to accomplish economic development by design. It’s not painting by numbers, as past failures only too clearly demonstrate. But we do know some of the ingredients, and openness, including openness to international trade and investment, is one of them.

Looking ahead

The world economic outlook is still extraordinarily troubling and unclear. Lower interest rates, tax cuts and the reduction in oil prices compared with last year should help to restore growth in the US. Meanwhile, the slowdown has spread to most other advanced economies, and emerging markets are experiencing a bout of that contagious turmoil that has become familiar over the past 20 years or so.

It isn’t the easiest of times to sell the merits of technology and globalization – and hasn’t been since the mid-1990s with seemingly one crisis after another.

Instability in specific markets might be a permanent feature of the new global economy in which information flows so fast and people influence each other so quickly. The ever-present herd instinct and tendency to bubbles is magnified by the new information and communications technologies. While it doesn’t necessarily imply any greater instability in the system as a whole, it seems probable that there are more specific uncertainties than ever.

Indeed, there exists now deep and unavoidable technological uncertainty. It’s not just that the technologies are new, or that one can’t tell from this point on the timeline of history which of competing technologies will win. It’s a bit more fundamental still.

Nor is it just the unknown scope for e-commerce, although the bursting of the dot com bubble should not be allowed to swing the pendulum of opinion too far the other way. Estimates that online purchasing can cut a company’s cost-base substantially are not unduly optimistic. It’s just that the obstacles to implementing this kind of system take longer to overcome than many people expected.

The reason there is deep technological uncertainty is that economic growth, in supposedly old-economy businesses like energy as well as new economy ones, depends ever more heavily on knowledge and ideas. New ideas are essentially combinations of old ideas. Isaac Newton put it rather more poetically when he described the advance of knowledge as ‘standing on the shoulders of giants’.

But the point about this sort of combinatory process is that it creates an almost infinite set of possibilities. It involves an exponential arithmetic. As we build on past technological discoveries we are creating an almost unimaginably rich array of future paths, and which one we will find ourselves following a decade or two from now is from the point of view of the present more or less indeterminate.

The essential point to hold onto, though, is that technology – whichever path it happens to be – holds out great promise, in the energy industry as in any other. But it is a promise that will only be fulfilled in the right conditions. These include a clear commitment to openness and liberalization within the framework of the multilateral trade system.

Conclusion

Business is in the front line in advancing the case for technology and for trade – especially so the energy sector because of the environmental challenges. The increasingly broad base of the protest movement is a political reality. What’s more, it is demonizing business – and business must respond if only out of self-interest. This has become an urgent task.

In a famous passage in his book on the Treaty of Versailles, Keynes pointed out the fragility of the gains from an earlier episode of globalization brought to an end by the First World War and the subsequent downward spiral in global trade flows. In August 1914, Keynes wrote:

“The inhabitant of London could order by telephone, sipping his morning tea in bed, the various products of the whole earth, in such quantity as he might see fit, and reasonably expect their early delivery upon his doorstep; he could at the same moment and by the same means adventure his wealth in the natural resources and new enterprises of any quarter of the world, and share, without exertion or even trouble, in their prospective fruits and advantages…… But, most important of all, he regarded this state of affairs as normal, certain, and permanent, except in the direction of further improvement, and any deviation from it as aberrant, scandalous, and avoidable. The projects and politics of militarism and imperialism, of racial and cultural rivalries, of monopolies, restrictions, and exclusion, which were to play the serpent to this paradise, were little more than the amusements of his daily newspaper, and appeared to exercise almost no influence at all on the ordinary course of social and economic life, the internationalisation of which was nearly complete in practice.”

This sanguine pre-Great War view soon proved tragically wrong. The lesson is that whatever benefits globalization brings, they need defending. A backlash can and did succeed then. Without wanting to draw parallels that are too alarmist, the current political and military uncertainties and the intellectual backlash mean we need to be especially vigilant now. It is, after all, a lot more than narrow business prospects that are at stake.

This is the text of a speech first delivered by Peter Sutherland at a Congress Meeting of the World Energy Council in Buenos Aires