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Understanding Energy Security: Balancing Needs of Consumers and Producers

Explore the complexities of energy security, the risks involved, and the importance of balancing consumer and producer concerns. Learn about global energy market dynamics and strategies to mitigate risks for sustainable energy supply.

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Understanding Energy Security: Balancing Needs of Consumers and Producers

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  1. CRIFES and Energy Security Clifford Gaddy The Brookings Institution Energy Security Roundtable 2nd Annual CAPCP Conference March 27, 2009

  2. Basic facts • Energy is a (nearly) unique good – about survival • only food rivals in importance • water? • Energy – especially fossil fuels - unequally distributed across nations • Divides world into consumers and producers • Energy security issue is primarily consumer’s problem • (when USA was net exporter – no problem)

  3. Basic facts … 2 • Producers’ concerns seen only as derivative of consumers’ • Results in lack of attention to/understanding of producers’ concerns • Therefore, one main CRIFES objective is to re-establish balance: both consumers’ and producers’ concerns • For both consumers and producers, key issue is RISK

  4. What is “energy security”? Daniel Yergin (CERA, The Prize) in Foreign Affairs, 2006: “In the developed world the usual definition of energy security is simply the availability of sufficient supplies at affordable prices…” but • “… different countries interpret what that concept means for them differently.”

  5. Obvious question: how do you define “sufficient” and “affordable”? Sufficient for what? • Energy is not the end in itself. • Different countries define “sufficient” differently because they have differing goals and objectives for the use of the energy.

  6. Some possible objectives: • national survival — national sovereignty, independence • citizens’ physical survival — main threats: cold, starvation • regime survival • standard of living — some acceptable minimum • “way of life” • continued economic growth

  7. Energy security for consumer is about risk • Risk of having “too little Q at too high a P” to meet the objectives • Different countries and different groups might pose different benchmark acceptable levels for any or all of these. • The amount and cost of energy required to ensure those objectives then defines the notion of energy security.

  8. There is no such thing as absolute security • The question is, how much security are you willing to pay for? • Makes energy security an economic issue • Trade-off between efficiency and survivability

  9. An efficient global market would solve everyone’s problems, but… • Because countries have different objectives, they are led to behave in ways that distort or constrain the market to their advantage. • Not likely that anyone is interested in perfectly efficient, fair market. • In addition, borders matter for production and investment. Endowments are not equal.

  10. Asymmetry of attention to producer and consumer concerns. • Consumer problem is about risk to survival. • Producer (net exporter) has no such risk. • That’s one reason why producer side concerns downplayed. • Other is that consumers are led by US. Most producers not developed countries.

  11. CRIFES Approach • Look at consumer and producer problem jointly • Russia is biggest producer • US is biggest consumer • Focus on increasing global supply • Focus on oil and gas • will matter for long time

  12. Facts about producers • World divided not just into consumers and producers • Producers are divided into: • Low Cost Producers (e.g., Saudi Arabia) • High Cost Producers (e.g., Russia) • Future depends on output from HC Producers • arctic offshore, tar sands, East Siberia • But HC choices subject to LC behavior

  13. OPEC • OPEC is LC producer cartel • Keeps LC fields out of production • Therefore leads to inefficient distribution of production • More important: creates price risk to HC producers • Result: restrains investment by HC

  14. High Cost Producers • People confuse nature of the higher cost • It is not just that marginal cost is higher • It is the high fixed cost of developing the project • Shtokman • Eastern Siberia • A lot of it is state investment above and beyond drilling • Cost of cold issue => this is Eastern Siberia

  15. MOSCOW PERM OMSK KRASNOYARSK IRKUTSK TROMSO MURMANSK YAKUTSK

  16. Example of Problem:Fate of “Federal Highway” M-56, September 2006 • Only road connecting the republic of Sakha with rest of Russia • Permafrost region • covered by gravel, not asphalt • September 10-19, 2006 • paralyzed • over 1,000 vehicles stranded

  17. In sum, Russia faces problem of irreversible investments and big price risk • Big discrete investment projects • Consumers want the investment but underappreciate the risk burden on HC producer

  18. Further elements of price risk • General price uncertainty (volatility) • Nobody knows • Climate change policies increase risk • Technological risk (alternative energies)

  19. CRIFES Problem: How does producer deal with risk? • Two ways to deal with risk • Reduce risk • Not smoking in bed • Reduce impact if does occur - Diversification • In this context it is income diversification • Investment of surpluses in West • Russia cannot diversify domestically • E.g., Uralvagonzavod • So it is foreign investment • And inward investment in Russian oil

  20. Railcar Production and the Oil Price

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