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Energy Security

What about the security of Demand?

The two sides of the same security-coin

What about the security of Demand? What about the security of Demand?
Grafik: Energlobe

Quite simply, without energy, there would be no life. Access to energy, so to speak, is access to life. Mankind has always been looking for new and better sources of energy. Countries have been competing for energy resources for centuries. Energy is at the heart of the global economy. It fuels development and prosperity. It is essential to how economies are powered and the environment is managed. Energy is also key to political stability. Thus, when we talk about energy security, we are referring to one of the very essential prerequisites to improving the quality of life.

Energy security embraces the fundamental aspect of making sure that people’s access to energy is secure, reliable, affordable, and sustainable. All countries around the world have an interest in promoting new technologies and sources of energy –including renewable energy – to reduce pollution, to diversify the energy supply, to create jobs, and to address the real challenge of climate change. Energy security cuts across the entirety of countries’ foreign policies. It’s a matter of national security and global stability. Energy security rests at the core of geopolitics, because fundamentally, energy is an issue of wealth and power. Which means it can be both a source of conflict and venue for cooperation. It’s also a matter of international security. All countries have interest in resolving disputes over energy, and keeping energy supplies and markets stable through all global crises. That’s why international fora have identified energy security as a key issue in today’s interdependent world. In this article, I’d like to put forward a perspective of energy security that brings together the interrelated issues of ‘security of supply’ and ‘security of demand’ as both sides of the same coin. This means ensuring the continuity of global supplies, while also reducing uncertainty of demand.

Energy security is a concept notorious for its vague and slippery nature, no less so because it is bound to mean different things at different times to different actors within the international energy system. The concept that has overtime evolved into “global energy security” is so fundamental to life in the 21st century that every effort must be made to clarify its meaning, to gain a consensus on this and to ensure that its true principles are embodied in decision-making processes across the energy sector by all major players. Energy Security should be universal, applying to rich and poor nations alike; it should seek to honor the spirit of Johannesburg 2002, the UN World Summit on Sustainable Development. It should be reciprocal. Security of demand is as important to producers as security of supply is to consumers. It should apply to all energy sources in a manner that is free from prejudicial regulatory and legislative measures. The concept should apply to the entire supply chain. Bottlenecks can have a major impact on steady, secure supplies to the consumer. Energy security should cover all foreseeable time-horizons. Security tomorrow is as important as security today, and provision must be made for this at all times through sound investment strategies. In recent years, we have seen how concern over security of future supply can significantly impact today’s prices. Energy security should focus on providing all consumers with the most modern energy products, meeting the highest environmental standards and benefiting from the application of the latest technology. And Energy security should be openly receptive to dialogue and cooperation among the leading players in the energy market, to facilitate the market’s sound evolution in a balanced and equitable manner both now and in the future.

The new century has witnessed a heightened level of concern about energy security, and this has been particularly pronounced in recent years. If there is a year, which could be described as a watershed for the energy security issue, it was 2006. This saw a broader understanding emerge in the world at large about energy security, as the issue rose high on the international agenda. Notably, it featured prominently in the European Union’s “Green Paper on a European Strategy for Sustainable, Competitive and Secure Energy”; it provided the central theme of the Tenth International Energy Forum (IEF) in Doha– ”Energy security, a shared responsibility” – and it headed the agenda at the G7/G8 in St. Petersburg in July, 2006 which resulted in the “Plan of Action on Global Energy Security”. The point of putting energy security top of the agenda was to require energy consumers and producers to examine the problem not just from their own viewpoint, but consider also the needs and concerns of the other party. Overall, there was a shift away from longstanding narrow, self-interested views of energy security, with a strong emphasis on security of supply by consumers, to a greater appreciation of its broader, more universal nature, particularly with regard to the fact that security of supply and security of demand are mutually supportive concepts and must go hand-in-hand.

The number one concern related to energy security of consumers around the world is the security of supply. It’s clear that there are ample energy resources the world over; resources are plentiful. When we speak of the security of energy supply, the challenge is not related to the availability of resources; there are enough resources to satisfy consumers for decades to come. How to find, develop, produce, transport, refine and deliver oil to end-users in an efficient, timely, sustainable, economic, reliable and environmentally-sound manner remains a key objective. The challenge really has to do with deliverability and sustainability.

Almost all major energy-producing countries are highly dependent on energy. This dependence typically entails a very large contribution of the energy sector to the GDP, a high percentage of energy exports in total export earnings, and a large percentage share for energy income in total government revenue. In most cases, this dependence is high enough to create a mutual dependence between energy suppliers and energy consumers. The highly interdependent nature of the world energy system goes a long way toward eliminating the real likelihood that premeditated supply cuts will be used to damage importing economies during peacetime. Indeed, most oil flow disruptions have not been premeditated, at least not by any state or company officials in charge of flows. Rather they have been the result of accidents, transport problems or weather events. The rest have typically been the result of local unrest, strikes or geopolitical instabilities. Even the risk of cyber terrorism against critical energy infrastructure is higher than those stemming from the geopolitical use of supply cut-offs. Given the technical complexity of the world energy system and instability of international geopolitics, these are, however, real risks, unlikely to go away easily or quickly.

The other side of the energy security issue, as consumers are now recognizing, is security of demand. But recent global trends and policies have heightened uncertainties here. The widespread economic crisis in recent years has choked demand for energy. For example, in 2008 and 2009, world oil demand fell by 1.8 million barrels per day, the first time since the early 1980s that demand has declined in two successive years. In particular, this has exacerbated the downward trend in the OECD, where the contraction in oil demand has reached nearly 4.8 million barrels per day since 2005. This has also resulted in downward revisions to long-term world energy demand forecasts. In contrast to the OECD, there is significantly more growth – and solid growth forecasts – in developing countries. This provides a cushion for future demand. There is broad recognition that in the long-term energy consumption in these countries, especially the BRIC economies, is set to increase significantly. Just look at car ownership: 4.5 billion people in the world live in countries with less than 1 car for every 20 people, leaving significant room for a long-term expansion in car ownership and energy use.

While it’s true that we’ve seen signs of modest economic recovery as a result of the massive fiscal and monetary interventions of many governments, the strength and pace of this recovery has only been gradual: Unemployment in OECD countries is high; credit lines remain still tight for the real economy; and private sector spending has yet to expand at desired levels. Consequently, major institutions are continually revising expectations for future energy demand downward.

A much greater risk is the threats that the rhythm of energy investment falls short of that needed to continue to produce and deliver to markets sufficient supplies to meet projected demand.

Momentum of investment in the energy industry is as vital for continued research and development and encouraging new human capital, as it is for capacity expansion to meet future demand. More than 50 countries in Africa, Asia, and Latin America have begun action plans to bring energy investors to their markets and adopt a clear code of conduct to manage their potential resources without conflict. These investments will lower the high prices many poor people pay today, as well as increasing access to sustainable energy. But these countries are confronted by a major obstacle, in the shape of uncertainty over the amount of energy that will be required in the future. Before committing large sums to investment, they need a fair guarantee that consumers will want their product when the new capacity is in place. While some types of uncertainty are difficult to tackle, such as economic growth and technology, concrete measures can be taken when it comes to policy-making. Here I refer to consumer country policies. Unclear policies increase volatility and add to uncertainty. In this regard, non-discriminatory and realistic energy policies are essential for well-informed investment decisions. Unrealistic policy targets send confusing signals to investors and impede investment. It is important for consumer governments to recognize, in their policy-making, the reasonable investment needs of energy producers. Consumers themselves will benefit from this, because it will improve security of supply. The energy industry, with its long lead times, high levels of upfront investment and capital-intensive phases, requires certainty and predictability. Without this, investments, and the future needs of consumers are put at risk.

In an industry with big, costly and lengthy undertakings, reasonable prices need to prevail. Energy prices have implications for future investments – and, thus, future supply. In fact, prices and market stability are at the heart of the entire energy security discussion. Calls for energy producers to continually invest amid deteriorating economics simply fly in the face of basic economic sense –Reasonable and stable energy prices are necessary to encourage a broad range of investments across the energy spectrum. Extreme energy prices, whether too high or too low, are damaging to producers and consumers alike. Such volatility is devastating to an industry with massive upfront costs. The global marketplace increasingly determines energy prices and we have been witnessing a major structural change in the market in recent years, with energy becoming a financial asset class. This has greatly increased volatility and has been detrimental to stability of energy markets. It’s important to limit volatility and make sure energy prices continue to stay at reasonable levels. Stability of prices and markets benefit everyone.

Demands of an increasingly carbon-constrained world require an energy transformation in which a universal access to the latest technology and commercial scale deployment of cleaner fuel technologies is achieved. Governments can promote energy transformation through education about the value of energy efficiency and clean technology. But perhaps the most important step they can take is enacting policies that create an enabling environment that attracts investment and paves the way for large-scale energy infrastructure. Energy transformation can help promote new energy solutions, including cleaner fossil fuels, renewable energy and energy efficiency, to meet rising demand, diversify the global energy supply, and address climate change. The transformation to cleaner energy technology is central to reducing the world’s carbon emissions.

In addressing the challenges facing the energy industry today, these must be seen as going hand in hand with other broader-based concerns affecting mankind, notably sustainable development, environmental protection and the eradication of poverty. The environment has already been treated at the highest multilateral levels. Energy poverty is an aspect as important to developing countries as security of supply is to consumers. The world has an interest in helping 1.3 billion people worldwide that do not have access to a reliable, sustainable supply of energy. For them, life is a daily challenge and struggle. They burn coal and biomass, which are the dirtiest forms of energy – harmful to people’s health and bad for the environment. I believe the more they can access modern energy services, the better their chances of starting businesses, educating their children, increasing their incomes, and joining the global economy – all of which is good for them and good for the world. Expanding access to energy among poor populations is vital. In fact, when some people speak of ‘energy security’, what they have in mind is the fight against ‘energy poverty’. Recently, the United Nations has launched an initiative called “Sustainable Energy for All” which aims to achieve universal access to modern energy by the year 2030, and double both the global rate of improvement in energy efficiency and the share of renewable energy in the global energy mix.

Pointing a way forward to the future is never an easy task, and this is particularly true at present. Yet it is apparent that there is a need for energy market transparency and shared industry data, for improved regulation and for better predictability in energy policies. Several initiatives in this area are presently being promoted like the Extractive Industries Transparency Initiative and the Joint Organizations Data initiative (JODI). These initiatives are international programs that promote transparency and accountability in the energy industry.

Energy security cannot be handled in isolation in a world subjected increasingly to the forces of globalization. Energy interdependence should be the name of the game, where all parties treat energy security as a shared responsibility. It is important that a path is charted, and possibly the key to this is opening our eyes to the opportunities before us, particularly concerning the enhancement of cooperation. We should all recognize the importance of adopting a multilateral approach to dialogue and cooperation with all interested parties for the pursuit of stable and secure energy markets. In this regard, one must highlight the on going consumer-producer dialogue at of the International Energy Forum (IEF), which is a step in that direction. And in today’s environment, it is essential that all stakeholders sit down to look at such issues as the projects on the table, the investments, the costs, the various timeframes, the policy targets, market regulation and demand. The goal is to have a better understanding of each other and to provide a more stable setting in which investments and expansion flourish, economies witness stable growth, and where better access to reliable, affordable, economically viable, socially acceptable and environmentally-sound energy services help make energy poverty a thing of the past.

Dr. Hasan M. Qabazard is the former Director, Research Division of the OPEC Secretariat and now Chief Executive Officer at Kuwait Catalyst Company (the article was first published at the European Centre for Energy and Resource Security (EUCERS) at King’s College London, of which ENERGLOBE is media partner)

»THE CRISIS IN THE CONCEPT OF THE

WORLD ORDER (IS) THE ULTIMATE

INTERNATIONAL PROBLEM OF OUR DAYS.«

Henry Kissinger,„World Order“, August 2014