The world's energy system seems to have come unhinged. Oil is trading at record high prices because demand keeps rising even as supplies become unreliable. Oil exporters from Iran to Russia and Venezuela are using their petrocash to pursue agendas that undercut western security and interests. Supplies of natural gas also seem less secure than ever.

The root cause of these troubles is dysfunctional energy politics. The countries with the strongest incentives to cut their vulnerability to volatile energy markets - notably America - are unable to act because influential politicians view all serious policies as politically radioactive. Efforts to boost supply have little leverage because the most attractive geological riches are found mainly in countries where state-owned companies control the resources and outsiders have little clout. Thus, the current energy debates are generating a volcano of proposals that have no positive impact on tight markets.

Yet these structural barriers to serious policy remain hidden because the debate labours under the meaningless umbrella of "energy security". Proper policy on oil and gas must start with the distinct uses for these fuels - each requiring its own political strategy.

The effort on oil must focus on transportation. Vehicles and aircraft work best with liquid fuels that can store large quantities of energy in a compact space and flow easily through pipes to engines. Searching for a better substitute is worthwhile, but the effort faces an uphill battle. With today's technologies, no other energy liquid can reliably beat petroleum. Liquids can be made from coal, as South Africa and China are doing. But that approach is costly and has unattractive environmental implications. Brazil and the US have focused on ethanol, which they distill from sugar or grain from crops. However, those programmes, which account for less than 0.5 per cent of the world's energy liquids, have a negligible impact on the oil market. Yet, America is redoubling its ethanol effort because it is politically unbeatable to reward corn growers and grain handlers who are a formidable force in US politics. Indeed, requirements for ethanol in America have created a more rigid fuel supply system that actually raises the price of oil products, although ethanol's backers originally claimed they would cut energy costs. That same political force also blocks imports of cheaper Brazilian ethanol. In principle, a better approach is so-called "cellulosic ethanol", which promises lower costs as it converts whole plants into ethanol rather than just the grain. But like most messiahs, its attraction lies in the future. So far, nobody has made the system work at the scale of a commercial refinery.

The best way to temper oil demand today is by lifting efficiency. Even this economic winner is politically difficult to implement. The US, which consumes one-quarter of the world's oil, has not changed fuel efficiency standards for new cars in 16 years. Every big economy - even China's - has stricter fuel economy rules than America's. Political gridlock has stymied even modest proposals to allow trading of efficiency credits. A trading scheme is politically inconvenient as it could force US carmakers (which make generally inefficient cars) to buy valuable credits from foreign brands. No politican wants to multiply Detroit's problems.

Even better ideas - such as a stiffer petrol tax - stay stuck on opinion pages of newspapers and in academic journals. Despite what is increasingly termed today's "energy crisis", these ideas barely cross the lips of politicians who want to remain viable among the thicket of anti-tax conservatives and pro-Detroit lobbyists.

The approaches needed for natural gas are quite different. In western Europe, which has long depended on imported gas from Russia, Algeria and a few smaller suppliers, the vulnerabilities are particularly stark. In principle, though, gas dependencies are easier to manage than oil because gas has rivals for each of its major uses. In electric power generation, countries must preserve diversity - ensuring, for example, that advanced coal and nuclear technologies remain viable. While "diversity" is motherhood in energy policy, in reality it requires difficult choices. In continental Europe, for example, policy-­makers have not seriously confronted the conflict between the need for diversity while, at the same time, opening the power sector to morecompetition. Historically, companies in competitive power markets have invested heavily in gas because gas plants are smaller and require less capital than coal or nuclear plants.

Gas suppliers who dream of extending their powers forget that it is harder to corner gas markets when users have a choice. Algeria learnt that lesson in 1981 when it left a key pipeline empty in a pricing dispute with Italy - extracting a better price at the time but losing billions of dollars for the future by destroying its reputation as a reliable supplier.

That lesson should be sobering for Russia today. In December, Gazprom, Russia's giant state gas company, cut deliveries to Ukraine, which then siphoned supplies that flow on to Europe. The company rattled its pipes again last month - threatening retaliation if Europe dared try to wean itself from Russia's gas. While Gazprom's management must pander to Russian nationalism (where pipe-rattling is welcome), the company's long-term viability rests on its reliability as a supplier to lucrative west European markets. Similarly, the recent decision by Evo Morales, Bolivia's president, to nationalise his country's gas fields will give him a boost domestically and might generate some instant extra revenue, but it will also encourage his customers in Brazil and Argentina to look elsewhere for energy.

"Resource nationalism" is back in vogue. But for gas suppliers in particular, it usually ends badly - not least because the infrastructure is costly to build and buyers can afford to be choosy. Gas users can further subdue Russia's rattling by multiplying sources of supply. A robust market for liquefied natural gas will help.

The tendency for gridlock in energy politics means that policymakers must focus where tough decisions matter most, such as efficiency in the use of oil and diversity in the application of gas. Yet, prospects for serious policy are poor - not least because the US, which should be a leader, is the most hamstrung. Luckily, the markets are responding on their own - albeit slowly and patchily. Costly oil is encouraging conservation and new supplies; LNG is accelerating, and gas buyers are more wary of Russian gas than they were a decade ago when Russia was seen as a reliable supplier. If the political structure remains dysfunctional on matters of energy, then the best second is perhaps no policy at all.

For over ten years, two research groups in Brazil have been publishing conflicting reports on the status of emissions from hydroelectic power plants. While both agree that dams do produce greenhouse gases, the two teams dispute one another's methods and the magnitude of results. Because emissions from dams are significantly more complicated than emissions from thermal power plants, the issue has become so specialized as to be ignored by many policy planners.

In The Dam Debate and its Discontents, we evaluate the divergent arguments on methods. While at first glance the issue seems far from being resolved, we find that the pieces are in place for a resolution. Specifically, we suggest international oversight to help converge research results and boost confidence in new findings.

The Brazilian government is declaring victory in its decades-long struggle to become self-sufficient in the supply of oil. The milestone is cause for celebration in a country that has long paid a high price for imported energy.

It will also reverberate here in the United States where policy-makers, too, are trying to wean the nation from costly imports, jittery markets and the foreign spigot. But we must learn the right lessons. Brazil's success came not from treating oil as an addiction but by producing even more of the stuff and by becoming even more dependent on world markets

Here in the United States, most attention to Brazil's fuel supply has focused on the country's aggressive program to replace oil with ethanol that is made by fermenting homegrown sugar. American newspapers are filled with stories about Brazil's famous "flex fuel" vehicles that make it easy to switch between ethanol and conventional gasoline.

Guided partly by Brazil's apparent success, American policy-makers are crafting new mandates for ethanol, and flex fuel vehicles are now taking shape. We have the impression that ethanol is king.

In reality, ethanol is a minor player in Brazilian energy supply. It accounts for less than one-tenth of all the country's energy liquids.

The real source of Brazil's self-sufficiency is the country's extraordinary success in producing more oil. After the 1970s oil shocks, when Brazil's fuel import bill soared, the government pushed Petrobras, the state-controlled oil company, to look asunder for new energy sources.

Petrobras delivered, especially at home, where the firm pioneered the technologies that make it possible to extract oil locked in sediments under the seabed in extremely deep water. In the middle 1970s Brazil struggled to produce just 180,000 barrels of oil per day while importing four times that amount. Today it produces about 2 million and is self-sufficient. Indeed, the current milestone of self-sufficiency arrives with the inauguration of Brazil's newest deep water platform, the "P50." When P50 reaches its full output later this year, that one platform will deliver more liquid to Brazil than the country's entire ethanol program.

Brazil's self-sufficiency offers three lessons for U.S. energy policy:

-First is that ethanol, with current technology, will do little to sever our dependence on imported energy. Today's approach involves growing a crop - sugar in Brazil, corn in the United States - and then fermenting the fruits to yield fuel. Sugar plants in Brazil's climate are a lot more efficient at converting sunlight to biomass than is corn in the Midwest, but U.S. policy nonetheless favors corn (and imposes tariffs on imported sugar) because the program is really a scheme to deliver heartland votes rather than a commercially viable fuel.

Yet, even with Brazil's favorable climate and sugar's inviting biology, ethanol is already reaching the limit. That's because the land and other resources devoted to ethanol can be put to other uses such as growing food and cash crops.

Indeed, today the Brazilian government is actually reducing the share of ethanol that must be blended into gasoline because sugar growers prefer to make even more money by selling their product as sugar on the world market rather than fermenting it into alcohol.

New technologies - notably "cellulosic biomass"- could breathe fresh life into ethanol and replace still more oil. Cellulosic biomass is intriguing because it cuts costs by allowing the entire plant - the cellulose in the stalks, as well as the prized grain or sugar - to be fermented into fuel.

Advocates for this technology, including President Bush in his State of the Union address, have wrongly confused the sexy promise of this new-fangled approach to making ethanol with the practical realities of fuel markets. Schemes to produce cellulosic biomass, today, work only under special circumstances and nobody has delivered the fuel at the industrial scale that would be required for the technology to become commercially viable.

-Second, we should learn that, for now, the greatest force to loosen the world's oil markets lies with oil itself. We can use oil more efficiently, as would occur with a gasoline tax or wise fuel economy standards. But we can also find ways to produce more of the stuff - as Brazil did with Petrobras.

The problem for U.S. policy-makers is that the richest veins for new production lie mainly outside the United States and beyond our direct control.

Indeed, the Brazilian government made Petrobras more efficient by putting the firm partly beyond its control as well. When the government sold part of the company on international stock exchanges, it accepted Western accounting procedures and other strictures that have given Petrobras the autonomy and accountability to its shareholders that, in turn, helped make it an efficient company.

We have a stake in seeing other countries do the same - from Algeria to Mexico to Iran and even Russia. But we must remember that Brazil did this on its own, in response to internal pressures for reform, with little leverage from foreign governments.

-Third, we should learn from Brazil not to confuse the goal of greater self-sufficiency with the illusion of independence. Even as Brazil has become self-sufficient it has also, ironically, become more dependent on world markets. That's because the Brazilian government has wisely relaxed price controls so that the prices of fuels within the country are set to the world market. Thus Brazilians see real world prices when they fill up at the pump, and the decisions about which cars to buy and how much to drive reflect real costs and benefits of the fuel they consume. That is why, even as the country becomes self-sufficient, Brazilians are working ever harder to be more frugal with oil - because the price at the pump is high and rising.

Dependence on oil is a liability that must be managed. But it is not an addiction.

Efficiency, sober policies toward modest alternatives such as ethanol, and more production - all tools of the manager, not the addict - are required. Brazil helps show the way, but only if we learn the right lessons.

For nearly two decades, most major developing countries have struggled to introduce market forces in their electric power systems. In every case, that effort has proceeded more slowly than reformers hoped and the outcomes have been hybrids that are far from the efficiency and organization of the "ideal" textbook model for a marketbased power system.

At the same time, growing concern about global climate change has put the spotlight on the need to build an international regulatory regime that includes strong incentives for key developing countries to control their emissions of greenhouse gases. In most of these countries, the power sector is a large source of emissions that, with effort, could be controlled.

The United Nations Framework Convention on Climate Change and the Kyoto Protocol included mechanisms that would reward developing nations that cut emissions, but so far the performance of these mechanisms has fallen far short of their potential.

Beginning in 2002, the Program on Energy and Sustainable Development (PESD) at the Stanford Institute for International Studies (SIIS) and the Indian Institute of Management in Ahmedabad (IIMA) have conducted a set of studies to examine the intersection of these two crucial challenges for the organization of energy infrastructures in the developing world. This research, funded by the U.S. Agency for International Development, examined power-market reforms and greenhouse-gas emissions in two key states in India. At the same time PESD was conducting a comprehensive study of electricity-market reforms in five developing countries (Brazil, China, India, Mexico, and South Africa) as well as detailed analyses of the greenhouse-gas emissions from three provinces in China in conjunction with other research partners.

PESD and IIMA presented their findings at a workshop on January 27-28, 2005, at Stanford University. The workshop brought together scholars studying the organization of the electric-power sector and other infrastructures in developing countries with energy policy makers, technologists, and those studying the effectiveness of international legal regimes, with the aim of not only focusing on new theories that are emerging to explain the organization of the power sector and the design of meaningful international institutions, but also identifying practical implications for investors, regulators, and policymakers.

The workshop offered diagnoses of what has gone wrong and what opportunities have nonetheless emerged. It focused on practical solutions and a look at the prospects for different technologies to meet the growing demand for power while minimizing the ecological footprint of power generation.

One of the key conclusions of the research and the workshop, as discussed by David Victor, director of PESD, is that electricity markets in the developing world have not progressed inexorably and consistently from a state-owned model to an open market-based model. Rather, much as the experience of the past ten years in the United States has demonstrated, reform of electric-power systems has proceeded differentially between parts of the industry and between jurisdictional units, with some segments of the power generation, transmission, and distribution systems still dominated by the state and some segments now fully responsive to signals from the market.

This hybrid condition-with portions of the electricity enterprise deregulated and other portions still fully regulated-has proven to be virtually universal and quite durable as well. For the most part, it also has proven beneficial to the overall operation of the system as well as to climate mitigation due to the fact that introduction of market forces to parts of the system tends to have a spillover effect, helping to improve efficiency in parts of the system that remain under state control.

Tom Heller, SIIS senior fellow, noted that the negotiations leading up to the

development of the Kyoto Protocol and subsequent discussions and experience have

demonstrated that the burden-sharing metaphor-expecting developing nations to

make a proportional investment and effort in reducing greenhouse-gas emissions-

will not be successful. Rather, as gross and per capita energy consumption increases in developing nations, which is occurring especially rapidly in China and India, policies and mechanisms that facilitate investment in efficient and clean energy production, transmission, and end-use infrastructures will need to be developed and rolled out.

The Kyoto Protocol provided a Clean Development Mechanism (CDM) to encourage such investment. However, the conclusion reached by practitioners developing such projects in China is that CDM is an inefficient and insufficient mechanism for fostering the magnitude of development projects that will be required to help mitigate the environmental effects of energy growth in the developing nations.

Two problems with CDM were raised at the workshop. First, the bureaucratic hurdles facing developers of CDM projects are daunting. To date no such project has received certification. Second, the Kyoto Protocol's current round of reductions targets expires in 2012, and uncertainty regarding the likely direction and form of future U.S. and European initiatives provides a disincentive to investment in CDM projects.

Alberto Chiappa, managing director of Energy Systems International, noted the good news is that in spite of these difficulties, investors are finding opportunities to develop projects to provide cleaner sources of energy and improve end-use energy efficiency. Professor P.R. Shukla of IIMA pointed out that there is a great need to align development and climate concerns if future mechanisms for climate mitigation in the developing world are to be successful.

Douglas Ogden, program officer at the Energy Foundation, noted that China has made a firm commitment to greatly increase the market share of electricity from renewable sources to 5 percent by 2010 and 20 percent by 2020 and in 2008 will adopt an automobile fuel-economy standard 20 percent more efficient than U.S. CAFE standards. Also, both China and India are engaged in developing natural gas markets in sectors traditionally dominated by coal.

Mario Pereira, director of Power Systems Research, discussed Brazil's current efforts to develop economical and efficient electricity supply through biomass-specifically ethanol derived from sugarcane bagasse. The ethanol industry was originally developed as a reaction to the oil shocks of the 1970s. Although the majority of electricity in Brazil is provided by hydroelectric projects, sugarcane ethanol has some important advantages. First, the sugarcane fields are geographically close to major centers of demand, and second, sugarcane thrives during drier periods of the year when hydroelectric production declines. The experience in Brazil thus demonstrates that renewables can provide an economically attractive source of energy for developing nations.

Looking toward the future, PESD has several projects under way pertaining to the

intersection of electricity-market reforms and global climate change. The program is expanding its research on power-market reforms through a set of case studies on independent power producer projects in ten developing nations and is also initiating a set of studies examining the introduction of natural gas to regions in India and China.

Much work remains to be done before the interface between electricity-market reform and global climate change is well understood. As energy markets in the developing world expand, addressing this question will become more and more important if we are to stabilize atmospheric levels of greenhouse gases.