2010/02/20

MSC Booklet Paper No. 1: Global Energy Security. The Challenges Ahead and how to Meet Them

During the past decade, "energy security" has made it to the top of policy agendas, in industrialized and emerging economies alike. A unique blend of threats and challenges – gas crises in Europe, a resurgence of resource nationalism, massive oil price volatility and climate change – call for a fundamental restructuring of the global energy system. The predominant lens on global energy challenges is a geopolitical one portraying energy security as a zero-sum game. But contrary to conventional wisdom, neither reinforcing the navy in the Strait of Hormuz nor putting NATO in charge of energy security will address the core issues at stake. Such hard security remedies do little to bolster global energy security. Rather, what is needed in 2010 is a bold push to upgrade and reform the rules and institutions that structure global energy relations. 

These intertwined trends result in fundamental challenges to the international energy system. First, new consumer heavyweights weaken established instruments to buffer oil supply shocks. By 2030, the IEA members’ share in global oil consumption will stand at 36% – down from 68% in 1974. As a consequence, the IEA’s strategic petroleum stocks will become ineffective in the event of a sudden supply drop, due to a strike in Venezuela, turmoil in Nigeria or renewed conflict at the Gulf.

Moreover, as latecomers to the oil business, new consumers do not trust current market structures, which are seen as biased toward established players, notably the US. To be sure, bilateral deals struck by Chinese National Oil Companies (NOCs) in Africa or Central Asia are not a problem as such. The oil brought onstream either ends up on the global market or is shipped back home to China, thus taking pressure off demand. Yet, this crude is no longer made ‘visible’. In that, energy diplomacy adds to a prevalent transparency problem: state companies, often opaquely governed, have come to control the bulk of global oil and gas reserves. As a consequence, information on fundamental market parameters is not available, opening the floor for enhanced speculation and, thus, price volatility.

In fact, and finally, oil prices saw an all-time high of $142 per barrel in July 2008, fell to $30 a few months later, and more than doubled again at the end of 2009. This is detrimental to both energy security and a low carbon future. Producer countries will only invest billions of dollars into finding new resources if they can anticipate a stable and sufficient return on their investment. To the same extent, shifting towards low carbon sources requires planning security. Public money alone will not do the trick. The bulk of funds will need to come from companies, households and commercial investors. All of them need a reliable price environment – long term.

Dealing with these challenges requires an adjustment of the institutions governing global energy. The goal of such an overhaul is to accommodate the new consumer heavyweights, to reduce oil price volatility and to secure the necessary investments, both in fossils and renewables. The steps to be taken are manifold. They include aligning China and India with the IEA’s emergency response programs; strengthening instruments enhancing market transparency such as the Joint Oil Data Initiative (JODI); making renewed efforts towards a Eurasian energy trade regime, crucially including a veritable dispute settlement mechanism; and revising the WTO’s provisions on trade in energy services, renewables and biofuels to foster a globally optimal allocation of capital and technology. Most importantly, producers and consumer need to sit down and discuss long term energy futures. Putting the IEA and OPEC in charge of this task is ill advised as they represent vested interests and fail to accommodate either major or emerging producers, such as Russia and Brazil or new consumers such as China and India. The G8 is an economic club that does not represent key producers. The International Energy Forum, a fairly recent institution, may be a promising platform. Strengthening the dialogue within the IEF will give producers enhanced planning security on future demand trajectories in consuming nations, while providing consumers with a clearer picture of what key producer regions will bring onstream. It also helps to build trust between old and new consumers, and to strengthen confidence in markets among more energy-mercantilist countries like China. These efforts could be politically flanked by the G20, a forum that enjoys increasing legitimacy in a multi-polar world.

Such a fundamental process needs to crucially involve key stakeholders, notably the US and China. Functioning market and planning security are both in their national interests. Both the US and China are in the process shifting towards green technologies. In addition, Chinese NOCs and their private US counterparts, seeking access to foreign reserves, have an interest in stable and reliable conditions of investment.

Make no mistake: all this is a thoroughly political exercise. Yet, the focus needs to be on creating win-win situations through institutions, not on zero-sum games. As energy affects all aspects of human security, it certainly also require special care. But in political economy terms, not hard security ones.

Canada and South Korea co-chair the G20 summits in 2010. They should heed this call.

Andreas Goldthau is Associate Professor in Public Policy, Central European University and Fellow, Global Public Policy Institute (GPPi) in Berlin. Email: agoldthau@gppi.net.