Thirty years ago, following the first oil crisis, the concept of energy security was born. In the years that followed the market moved on to the concept of commoditisation with the launch of futures and OTC contracts, market liberalisation and deregulation, and finally the concept of environmental sustainability to counter climate change. Now the market has seemingly moved full circle and energy security is back at the top of the agenda. Or is it?
Ahead of the annual G8 summit, hosted by Russia, the word was that energy security would be the main theme of the three-day meeting, but the subsequent commitment from the G8 leaders made no reference to security, and merely stated a general commitment to “open, transparent, efficient and competitive markets.” Some will argue that open, efficient and competitive markets are pre-requisites for facilitating greater security, which they are, but on their own these functions do not make a market more secure.
For consuming countries supply security is broadly defined as having reliable, available and affordable energy supplies, while for producing countries security is generally defined as having sufficient access to markets and consumers to justify investment in developing future energy supplies. Clearly there has to be a degree of symbiosis between the two but in recent years the focus has been more weighted towards supply security as energy reserves start to deplete and pressure for a more environmentally sustainable approach to energy policy gathered pace.
While energy security can be given a macro definition it is for each country to determine the specific definition of energy security. In Europe, for example, security largely relates to gas supply availability. But security is not a national or regional issue. As energy markets are global then so is their security, and to focus on just one part of the global energy infrastructure or value chain will not guarantee security. Take the example of Europe. Its supply security focus is on gas because the region is becoming increasingly dependent on gas imports to meet its demand. But while the actual availability and reliability of Europe’s energy needs relate to gas, the affordability does not. As a recent analysis of EU industrial gas prices confirms, EU gas prices are highly correlated to crude oil prices. So if the EU wants to truly protect its supply security it has to address the global oil market, which in turn is impacted by a potent cocktail of geopolitical concerns – the latest of which is a conflict between two countries, neither of which is a major oil consumer or producer, but which pushed crude futures close to $80/bl – and fundamental realities.
To be fully energy secure countries have to be energy independent, but for the major energy consuming countries this will never be realised. In 1973 US president Richard Nixon aspired to the vision of US energy independence, but in reality the US has seen its dependence on oil imports double in the 33 years since. Today the vision of energy independence is being touted under a different guise – that of energy sustainability. The development of renewable energy sources such as wind, solar and tidal are all independent energy sources and a number of countries have set challenging targets for the market share of generation to be provided by renewable sources. It is also interesting to note that since sustainability began to be incorporated within energy policy concerns over supply security have increased.
There is no real energy supply security problem at the moment. There are sufficient combined reserves of oil gas and coal to meet global energy demand for the remainder of this century, and if we were not overly preoccupied with environmental challenges such as climate change then the issue of supply security would be considerably less prominent. The supply security problem that we face is largely a green issue, and one that is self-made. Yet until policy makers have the strength of character to build energy policy around supply security, as opposed to building it around the environment, supply risks will likely escalate.
The UK again fell into this trap when presenting its Energy Review in July and appears to remain blinkered by carbon. In the Review the government lists the two major challenges faced as reducing carbon emissions and improving energy security. It further believes that the respective challenges of lowering carbon emissions and protecting supply security are closely linked and that the impetus has to come from the carbon market.
The government perceives carbon as being integral to energy policy because of its impact (either directly or indirectly) on electricity prices. Indeed such is the perceived importance of carbon that the Review even proposes a carbon pricing market system to promote low/zero carbon fuels and raises the prospect of introducing a mandatory emissions trading scheme for businesses not currently covered by the EU Emission Trading Scheme. It is accepted that a high carbon price will support long-term investment in new generation, such as clean coal and carbon capture technology, but the UK government cannot fix the carbon price. Indeed the government’s experience to date is that other member states are not inclined to follow the lead of the UK on carbon issues. And with a current price of carbon below h20/t, and with the consensus among analysts that a carbon price nearer h50/t is required to stimulate long-term investment in new generation technologies, the argument for building energy policy around carbon emission reductions is further weakened.
Energy security needs to be put back at the top of the agenda and energy policy has to be developed around the central premise of security. As important as sustainability is, it cannot be allowed to subordinate the importance of security and until these priorities are reversed it is difficult to see how a truly secure energy market can be achieved.