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CRIFES and Energy Security

CRIFES and Energy Security. Clifford Gaddy The Brookings Institution Energy Security Roundtable 2 nd Annual CAPCP Conference March 27, 2009. Basic facts. Energy is a (nearly) unique good – about survival only food rivals in importance water?

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CRIFES and Energy Security

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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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