Civil G8 2006

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Leonid Grigoriev. A Chance For Formation Of A Global Energy Policy


The heightened attention paid to energy security issues in the modern world is usually explained in terms of political non-sustainability in oil-exporting countries, the threat of acts of terrorism, and the complexity of interrelations between supplier countries and transit states (mainly with regard to pipeline gas). It stands to reason that this unease is justified in cases where insurgents are blocking development of oil extraction and export (irrespective of the causes and nature of the conflicts themselves), such as in Nigeria and Iraq. Supplies from Venezuela and Iran are charged with political rhetoric, and in the latter case the threat of a serious conflict is clear. Moreover, several specialists doubt the reliability of the oil and gas reserve data of a range of major producer countries. The nervousness of political and financial elites can be imagined for itself in countries with high and growing dependency on energy imports, given the uncertainty with regard to future prices and the entirely possible, though far-off, threat of a logistical overload with regard to supplies. We believe that the world has reached a point where further large-scale investments and upheavals in the energy sphere will require greater predictability and coordination for all interested parties C some sort of equivalent global energy policy.
The history of the 20th century shows the difficulty of balancing the interests of all main global oil market participants. The market has rarely appeared sustainable owing to a lack of balance caused by certain important economic factors, and any return to a new imbalance could last decades. It would be reckless to simplify the historical or current situation in the oil market by reducing it solely to political or purely economic factors. There is a complex network of problems here, chief among which are:
- Inequality in distribution of oil resources, difference in costs of extraction bearing in mind investment needs.
- Organisation of the global oil market: spot prices, the futures game, etc.
- Energy-saving processes in consumer countries, in connection with price levels and government policies.
- Macroeconomic and tax interests of producer countries.
- Social and political characteristics of producer countries.
- Specifics of the interests of oil companies in consumer and producer countries.
The understanding of energy security differs between consumer and producer countries in rather obvious ways. Of course, there is not, and has never been, any unified energy policy for all countries of the world, rich and poor, exporters and importers, countries with state-owned and private energy companies. As the lesson of the 1990s shows, differences between the interests of parties are conched not so much in terms of current problems of prices and supplies, rather they relate to assurance of future supplies, future prices and returns on investment. An important factor for developed consumer and importer countries is guaranteed oil and gas supplies in the long term, without any shocking price fluctuations affecting economic growth: energy security as access to sufficient (in terms of scale), reliable and accessible (in price terms) energy (IEA definition). The oil embargo of the 1970s spawned a spot oil market, the International Energy Agency and the OECD. The global economic crises of the mid-70s and particularly the early 80s, with their high oil prices (which even now are yet to be exceeded in real terms), caused deep-seated changes to economic policy, structures of investment and population behaviour, owing to the huge savings required in energy use per unit of GDP. On this objective basis, the global oil policies of the OECD countries enjoyed complete success C oil prices fell during 1986-2000 by an average of 19 dollars per barrel. The role and weight of OPEC also decreased over this time, and oil market liberalisation took root.
It seemed that all problems had been solved,. And the prolonged worldwide economic upturn of the 1990s took place under rather low and strategically stable (by the standards of the time) oil price conditions. A 3 percentage point growth in real GDP would cause around 1 percentage point of oil price growth. The increase in Chinese oil demand was also significant, but did not create any problems due to the stabilisation of EU and Japanese oil consumption in absolute terms. The growth in supplies came primarily from countries outside OPEC, though the cartel's supplies also grew by up to 0.6 mbd each year. But the revival and growth of oil extraction in Russia at the end of the 90s and early 2000s compensated for slow growth in extraction in the OPEC countries . Even the partial embargo on Iraqi oil never caused any particular market difficulties.
The unified energy policy of the OECD was not prepared independently of the IEF agenda, specifically with regard to energy security, and its core characteristics had much in common for developing countries. During this period there was a discontinuation of atomic energy development in most countries, and a rapid shift from coal to gas in the consumption structure of major developed consumer countries. These policy features were supported by voters in the leading democracies, who are generally inclined to support steps toward more energy-efficient economies owing to the constant efforts of environmentalists and energy scientists. As we now understand, this illusion of well-being had one very important consequence, that of slow growth of investment in oil extraction. This was influenced by the moderate growth in returns on investment while oil prices remained at 19 dollars per barrel, by limitations on companies' access to new deposits, and by the absence of any crisis situations requiring mobilisation of practical resources. Pressure from environmentalists and civil society organisations reinforced the steps taken in the field of combating global warming, as expressed by the conclusion, adoption and ratification of the Kyoto Protocol.
The idea that expensive oil was a thing of the past began to dominate. In summer 2001, G. Mitchell and other authors of the book 'The New Economy of Oil' wrote: the threat of political sanctions has lifted. It is now the exporting countries that should be concerned about sanctions aimed at influencing their internal and foreign policies by governments and public opinion in developed countries . Even the brief 'buyer's market' situation brought to life the idea of political sanctions by oil purchasers. This was based on the situation during the economic decline of 2000-2002, when oil prices stagnated in developed countries. The new conditions under which the world now finds itself are summarised by Table 1, which shows the level of imbalance between countries



The issue of energy security began to escalate for political reasons in connection with conflicts in the Middle East following 11 September 2001. However, in parallel, the oil market was coming under surreptitious pressure, which under the upsurge conditions of 2003-2005 manifested itself in increases in demand of up to around 2% per year, and depletion of free capacity for oil extraction and refining. Of course this had already been influenced by the substantial growth in Chinese demand and the limited Russian ability to increase supply from old deposits. No oil shortages have yet taken place, and high energy resource prices did not stop the general economic upturn in 2005. This can largely be explained by the producer countries' additional import demand for industrial products from the developed countries . However, the possibility of an future imbalance in the oil market (particularly for political reasons), as well as forecasts of how long oil and gas prices will remain high, have come to dominate in terms of determining economic expectations. In just two years, the basis for long-term forecasting and discussion of energy security has changed completely.
Developed countries face the necessity of comprehensively reviewing their national strategies and general energy policies given all the conventionalities of this concept. The range of options is huge: from a return to coal (clean technologies) or atomic energy under strict internal constraints in a range of countries, to a radical turn toward renewable sources. In other words, energy security as a goal can be achieved only through combined efforts by many countries. The governments and companies of consumer companies are faced with the following major tasks:
● Quickly identifying appropriate problem-solving techniques with regard to changes in energy strategy and policies.
● Finding a system of instruments for ensuring relevant internal capital investments and structural changes.
● Finding politically acceptable methods of endorsement and support for voters, who will have to pay for any restructuring both through taxes and in changes to way of life, given that certain resolutions may meet with opposition (atomic energy, for example).
● Creating an acceptable basis for cooperation with other major players on the global energy market.
The Communique of the Ministers of Finance states: "In order to improve the smooth functioning and stability of markets, we agreed to take forward work on enhancing the global energy policy dialogue between oil producing and consuming countries and the private sector . The idea of dialogue on global energy policy is to be welcomed, as it will involve taking into account the long-term interests of key players. The issue of 'smoothness' in market functioning given such high prices is bound to give rise to questions. Firstly, markets work out any unusually high swings in prices. And secondly, under this market organisation, energy companies have an interest in shifts requiring large investments and changes to the conditions from which they derive high incomes. Table 2 shows income dynamics and share prices for the world's leading companies over the period 2000-2005.
In the event of a new energy policy directed at shifts toward atomic energy (if political limitations will allow it), significant state funds and guarantees will be required for revival of this sector after a twenty-year standstill. A structural shift toward renewable resources, particularly biological fuel, would require a corresponding tax structure, and huge investments in replacing generations of cars and fuelling stations. Any technological leap toward hydrogen fuel will also require investment in research, as well as time and financial investments in replacing large amounts of expensive equipment. Therefore, the opportunity for quick transition to cleaner, energy-saving technologies and renewable energy sources can only exist if accompanied by well-orchestrated large-scale efforts by the world's leading countries. It is important here that we should not lose sight of the developing countries, and should not increase the size of the gulf in access to energy, the nature of this energy, its cleanliness, method of production, and cost. The opportunities available to net consumers of energy vary greatly depending on their financial capabilities.



An important factor for energy-exporter countries is predictability of prices and incomes. Russia's financial crash of 1998 was partially a side product of a dive in prices to 12 dollars per barrel. These drops in income for exporters of oil (and, to a lesser extent, gas) were a result of the specifics of 'smooth' oil and finance market operation. Shifts in demand and prices were reflected by non-linear shifts in cash flows. A requirement of transition to renewable energy for importer countries is additional taxation for financing the relevant investments. But as regards producers, these expenses may be taken from current incomes, almost like an investment in lowering future income. If this happens, global energy policy can take into account the interest of producers in predictability and sustainability of incomes. Otherwise we will face prolonged nervousness with regard to price fluctuations, or lack thereof, or even their collapse to 1986 or 1998 levels, which would cause serious economic and socioeconomic side effects for many countries. A glance at Table 3 is sufficient to understand how the doubling of the normal export incomes of Venezuela, Iran and other producers (frequently these are state companies) allows new development goals to be set. This is a great responsibility for the governments of the producer countries to use this period of high incomes for resolution of national tasks. Of course, the question remains of how exactly these tasks are understood, and how effectively the windfall funds are used. It should be remarked that completely rational behaviour and foresight have never been a particularly common feature in history, even in developed countries. However, should predictability and agreement on future actions in the field of global energy markets come to pass, we will see greater opportunities to combine the development goals of different groups of countries with progressive changes in the energy sector itself.



The connection between the development interests of exporter countries and the energy security interests of consumers represents an attempt to form a global energy policy, which must take into account the objective long-term interests of key participant groups. The new global energy policy may be formed and economically viable only on condition that no significant party in the process is left in an aggrieved condition. This primarily relates to the effects of unsustainable prices defined by spot markets, and large-scale long-term investment in energy projects, be they atomic, hydrocarbon-based, hydrogen-based or renewable in nature. To resolve all the problems of the global energy sector simultaneously (or in quick succession) is impossible it is a matter of tactics: one of choosing priority tasks which can be solved using the existing stimuli, interests and financial capabilities of the parties.
The paths chosen by the USA, EU, China and India toward resolution of their energy problems will also determine development conditions for the world's manufacturing industry and agriculture. We should note, without attempting to give a full overview of the possible features of any particular energy policy, that investment in modernisation of the Russian economy will largely depend on the scale of the shift toward biological fuel or atomic energy. One energy policy option could be to build up worldwide production of 'agricultural fuel crops', which would have a significant effect on agrarian subsidies and WTO relations. Another option for heightening energy security would be to strengthen the role of atomic energy, and develop liquefied natural gas (instead of pipeline gas) and facilities for its delivery. Where previously individual groups of countries were able to find solutions for stabilisation of energy markets, now, under conditions of globalisation and increased scale of the world's economic problems, it is a global policy that is required. Therefore, in practice, resolutions on energy security initiate formation of a long-term generally acceptable energy strategy, which gives a serious impulse toward sectoral and geographical structural change throughout the global economy.
Russia's interests in this complex combination will be affected by the dual nature of its objective position in the world: a great power with high levels of responsibility for the global situation, while simultaneously being a country with consumption levels matching those of the leading developing countries. The huge internal inequality in development and need for modernisation and renewal, throughout the economy, will be eliminated through use of the raw materials (energy) sectors. Environmental limitations and the position of civil society with regard to the choice of paths toward development must be taken into account in Russia in the same manner in which they are considered in global politics.
Russia has an objective interest in a predictable global energy policy, in order to ensure rational investment of its resources and optimal positioning of its energy companies. It cannot allow itself to pursue any excessively costly activities on the global arena, which would be to the detriment of the modernisation of its economy and the well-being of its citizens, or even those that might seem so, to the detriment of socio-political stability. This approach must balance Russia's contribution to global energy security and its opportunities to emerge as a scientific and technological power. This is an equilibrium point protecting the country both from neglecting global problems and from excessive exertion of the country's strengths following the long crisis period, as well as from suffering excessive transformation expenses.

Expert opinion

Halter Marek

02.12.06

Halter Marek
Le College de France
Olivier Giscard dEstaing

02.12.06

Olivier Giscard dEstaing
COPAM, France
Mika Ohbayashi

02.12.06

Mika Ohbayashi
Institute for Sustainable Energy Poliy
Bill Pace

02.12.06

Bill Pace
World Federalist Movement - Institute for Global Policy
Peter I. Hajnal

01.12.06

Peter I. Hajnal
Toronto University, G8 Research Group