On both sides of the Atlantic, foreign policy analysts have convinced policy makers that the West faces a severe energy security challenge. They promote either ‘energy independence’ or a ‘strategic approach’ to energy security. The West, they say, should stop being naïve about markets. Exporters are renationalising the energy industries and placing their energy assets at the heart of their foreign policy. Large new importers secure their supply through government-to-government deals. Energy policy has become high politics and energy security is hard security. The appropriate institution to deal with these concerns is no longer the International Energy Agency but NATO. It is time to challenge this vision.
The dynamics of global energy markets do not justify a new paradigm for energy security policy. The global oil market is not falling apart. Despite the move towards greater government control upstream, oil is still traded in a globally integrated, highly liquid commodity market. Accessing this market requires no diplomatic or military capacity whatsoever. If anything, the commoditisation of oil is still increasing as the rapid integration of China into the market boosts liquidity of Eastern oil trading.
The world economy does face a mid-term risk of liquid fuel scarcity and a short-term risk of oil supply disruption, but there is nothing here we are ill-equipped to deal with. The answer to the first concern is higher taxes on oil products, tougher fuel economy standards and increased spending on research, development and deployment of alternative transportation technologies. As for the higher risk of supply disruption, a new wave of investment is required in emergency storage, a move the United States seems to have already embarked on.
When the risks go up it makes sense to buy more insurance: more spending is needed on oil security policies. It is also important to go from an OECD-based regime to one that includes the fast-growing energy economies of China and India. Whether that means bringing these countries into the OECD or taking the International Energy Agency out of the Paris-based organisation is for governments to decide, but the goal is clear.
Both risks, above all, require that we let the markets work. One of the key lessons learnt since the painful experience of the 1970s is that free markets are the consumers’ first line of defence. Freedom to import and the absence of price regulation is what protected the US from physical disruption during the Venezuelan strike of 2002 and again after the 2005 hurricanes. Conversely, import and price regulations are the only cause of the chronic oil product shortages in China. As Beijing is learning and as we should not forget, oil supply security is too serious not to be left to the market.
Similarly, higher prices are not an energy security problem but a solution. Since the first oil shock, the energy intensity of the US GDP (the amount of oil used per unit of wealth created) has declined by almost 60%. The rate of decline had sharply slowed down when prices collapsed but since 2005 it bounced back to twice the ten-year average. US oil imports – for those who care about that – have not increased in almost three years and are about 10% higher than in January 2001. At this point in the Clinton presidency, US oil imports were 40% higher than when he took office, and rising.
The case for ‘strategic’ energy security policies is not much stronger for natural gas. True, reserves are concentrated and gas exporters might organise themselves to extract monopoly rents. This is no threat to security of supply, which is determined by the ability of the gas economy to cope with supply disruptions. And there is a good case for saying that the structural dynamics of natural gas markets provide consumers with an increasing degree of supply security.
Contracts become more flexible, gas-to-gas competition increases, once isolated regional markets are linked through arbitrage opportunities actively exploited by traders. Accordingly, bilateral relations become less relevant and the potential for spontaneous re-allocation of physical flows across markets increases.
The single biggest contribution to international gas supply security would be for the European Union to create a competitive, integrated gas market through unbundling of transmission networks from gas production and marketing. It would also radically diminish Russia’s ability to leverage the bilateral gas relationships, increasing the chance for Europe to speak with one voice to Moscow.
The dreams about ‘energy independence’ lead to expensive policies with no real energy security benefits and lots of adverse consequences. The nightmares about ‘energy wars’ feed discourses that fuel the very politicisation which the West should try to defuse and reinforce prejudices in China and India about the need for aggressive foreign energy policies – a process that looks like a vicious circle.
Energy security risks have probably gone up but have not changed in nature. More money is needed to buy more collective insurance. It should come in part from emerging countries, which should be brought into the consumer-led energy security regime. But energy independence is nonsense and a NATO for energy is dangerous nonsense.
Pierre Noël, Researcher at the University of Cambridge (EPRG) and at the European Council on Foreign Relations
P.S. A slightly different version of this article was published in the Financial Times on 11th January 2008.