Energy Security in Developed Democracies: Challenges and Solutions

1. NS4054 Fall Term 2015Fuels Paradise, Chapter 2What’s the Problem? Energy Security in the Developed Democracies

2. Overview • Asks several central questions: • What is energy security and • What have been the principal energy security concerns of the developed democracies? • In practice main external energy security concerns have been the result of actual or potential disruptions in supply of an imported energy source • Policy variations due to types of energy oil, natural gas, nuclear, and potential types of supply interruption • International embargoes • Production cut-backs • Domestic upheavals in energy exporting countries • Terrorist attacks, and • International conflict

3. Definition: Energy Security I • For practical purposes developed democracies faced very similar set of concerns in the 1970s – adequate quantities of oil from the Persian Gulf • More recent years concerns have diverged reflecting greater diversity in nature and sources of energy used. • Best definition of energy security – Daniel Yergin • “Objective of energy security is to assure adequate reliable supplies of energy at reasonable prices and in ways that do not jeopardize major national values and objectives.”

4. Definition: Energy Security II • Need to look closer at each dimension of energy security • First dimension – adequacy or sufficiency. Is the total volume of energy supplies enough to meet reasonable present and future needs? • Is increased energy efficiency or conservation possible? • Second dimension – reliability or certainty. Are energy supplies potentially subject to disruptions and interruptions of a significant magnitude or duration? • This introduces an element of risk – what are acceptable risks given the potential costs of reducing them? • Third dimension – economic affordability. Are energy supplies available at reasonable prices. • Even if supplies are adequate in volume and reliable, sufficiently high prices can eventually threaten nation’s national security by undermining its economy

5. Definition: Energy Security III • Fourth Dimension – do not jeopardize major national values of objectives. • Get into trilemma situation where energy security, and affordability may conflict with environmental goals • In sum energy insecurity can be the result of defects in any of these four dimensions. • When it comes to measures the state may take to increase energy security there can be important tradeoffs across them.

6. Energy Insecurity • External threats to energy security • How serious a threat in reduction in energy supplies, whether intended or not, will be a function of at least five factors: • Size of the disruption • Its duration, • The degree to which the country depends on the affected source, • The availability of alternative sources of supplies or substitutes, and • the country’s ability to reduce consumption of the relevant energy source. • The latter three factors will vary from country to country.

7. Threats to Energy Security I Historical threats to energy security: • Early Postwar Years • Following WWII U.S. Western Europe and Japan had a high degree of energy independence • Through most of 50s situation dis not change much • Oil from Persian Gulf increased, but remained relatively small share of total energy supply in Europe and Japan • Closure of the Suez Canal and the Iraq Petroleum pipeline through Syria during the 1956 Crisis presented a problem • Roughly three-quarters to four-fifths Western Europe’s oil then passed through canal or pipelines from the ME • Needed added tankers to bring oil around cape of Africa • Western Europe could turn to U.S. for supplies – U.S. exports to Europe increased 10x

8. Threats to Energy Security II • Arab/Israeli War of 1967 • By 1967 oil import dependence of advanced industrialized countries had reached significant proportions • Oil had increased from 20% of energy use to 50% and rising • Oil price had been around $2 per barrel for several years • Arab-Israeli war – Arab oil producer attempted to impose embargo on U.S, U.K. and Western Germany • Middle East oil stabilized at about 1.5 mbd below previous levels • Embargo failure – Arab countries could not agree on production cutbacks • Losses Made up by surge in U.S. production and increased output from Venezuela, Iran, and Indonesia

9. Threats to Energy Security III • First Oil Shock 1973-74 • Since Suez crisis several OPEC members had nationalized their oil industries • Demand increasing very fast • In contrast to earlier periods U.S. not much position to help Western Europe • However, companies able to reroute supplies so no one country suffered • Still prices increased from around $3 per barrel to $12 • Recessions in Western Europe, US may have been due to faulty policies rather than shortages • Initial fear of shortages and the unprecedented jump in oil prices came as major psychological blow with would affect Western publics and decision makers for years to come

10. Threats to Energy Security IV • Second Oil Shock 1978-79 • Caused by Iranian oil workers going on strike in October 1978 protesting policies of the Shah • By end of year Iranian exports fell from 4.5 mbd to zero. • Companies had been running down their inventories on assumption of falling prices • Other states did increase their output • Responses of consumers part of the problem – many buyers began building up stocks as quickly as possible t • Panic caused prices to jump from $13 to $41 • In absolute terms he second price hike was greater than the first. • Many economies went into recession • OECD put total economic loss of its members at 5% in 1980

11. Threats to Energy Security V • Subsequent Major Oil Supply Disruptions, 1980-2000 • Most center on disruptions in the Persian Gulf area • Start of Iran Iraq war in 1980 • Each side targeted the other’ oil production and export facilities • Syria shut down Iraq’s pipeline through its territory • Caused spot prices to jump – but much less than the 1970s • Companies had been building up stocks, so plenty of oil • Mid-1980s, oil price collapsed and remained relatively low until Iraq invasion of Kuwait

12. Threats to Energy Security VI • 1990 Iraq Invasion of Kuwait • Invasion removed 4 to 5 mbd of Iraqi and Kuwaiti exports from market – roughly 7% of global production • Spot price doubled from $16.50 to nearly $33 • Crisis short lived • Saudi Arabia increased production by 3 mbd and other OPEC countries added another 1.2 mbd • By time Operation Desert Storm began prices had fallen back to prewar levels and the crisis was over

13. Threats to Energy Security VII Common Energy Security Concerns Since 2000 • In 1970s importing countries faced common international dilemmas and shared interests • Resulted in similar energy security goals • Since 2000 picture more complicated with divergent energy security concerns • Still many of these concerns share common background conditions • An increasingly tight world oil market and • Growing dependence on imports of natural gas • During most of 1990s oil markets a buyers market and prices fluctuated between $10 and $20 per barrel • At end of decade market tightened and from September 2001 until 2008 increasing oil prices

14. Threats to Energy Security VIII • Much of the surge in demand during this period was from developing and emerging economies • Also production difficulties in Venezuela, Nigeria and Iraq took a considerable amount of oil off the market • Spot price $40 in 2004; $60 in 2005; $80 in 2007, and $100 in 2008 before reaching $150 in July 2008 • Most of the oil price increase was demand outrunning supply • However between $15 and $20 was a risk premium reflecting danger of another oil shock • Although price dropped to $30 in 2008 returned to historically high levels for the remainder of the decade – little over $100 until the oil price drop in Fall of 2014

15. Threats to Energy Security IX • Other principal energy concern – imports of natural gas. • West Germany started this trend in the 1970s when it began importing fro Netherlands, Norway and the Soviet Union • Japan soon followed by developing a LNG industry that could bring in gas rom other parts of Asia • Around 2000 UK natural gas fell off and imports started. • Many new suppliers sprung up – Nigeria and Qatar and pipelines from North Africa into Europe • New gas exporters potentially subject to same types of instability that threatened to disrupt world oil markets • Currently main problem – reliable deliveries from Russia