Middle East Economic Survey
VOL. LI
No 2
14
GENERAL
What Is Energy Security? (5/5)
By A F Alhajji
The following article was written for MEES by Dr Alhajji, president of the Ohio-based Energy Security Analysts, LLC. He can be reached via e-mail a@aalhajji.com. The article draws on a chapter entitled “India’s Energy Security: Concepts and Measures” in “West Asia in Turmoil,” published by the Institute for Defense Studies Analysis, New Delhi, India, 2007. Part four of Dr Alhajji’s five-part article on energy security was published in MEES, 24 December 2007.
Dependence, Interdependence, And Energy Security
Officials from various oil-consuming countries have stated in recent years that their objective is to eliminate dependence on oil imports. This far-fetched fantasy not only distorts the facts but also compromises energy policy and energy security in both oil-consuming and oil-producing countries. Those who want to eliminate dependence, especially in India and China, have to explain why they are also pushing their oil companies to increase their involvement in upstream operations in the oil producing countries. They have to explain why they are negotiating with other countries to build gas and oil pipelines to import oil and natural gas from Russia, the Caspian, and Iran. They argue that self-sufficiency is a long-term objective. In the short and medium term, they have to invest overseas and import oil and gas from neighboring countries via pipelines. Nonsense. Multi-billion pipeline projects are long-term investments. If investors are convinced that these projects are only for the short and medium term, they will not provide the capital needed to build them. If the oil producing countries are convinced that the investment of companies from the importing countries will continue only until they replace oil and gas, they will not allow these companies to invest.
Energy self-sufficiency does not shield the country from world supply disruptions and the resulting price increases. Even if the US, India, or China becomes self-sufficient, a disruption of Venezuelan oil supplies will increase oil prices worldwide, even in the self-sufficient countries. In this case, it does not matter whether a country imports 1 b/d or 3mn b/d. Prices will go up by the same percentage. The effect of oil price increases on the economy will be the same whether it is dependent on foreign oil supplies or domestic supplies. The data demonstrate that eliminating dependency may not improve energy security. It illustrates a strikingly negative correlation between prices and total available additional oil supplies, which include excess capacity and stocks. Prices increased when excess capacity and stocks were low, regardless of the level of dependence on oil imports. For prices to stabilize, both excess capacity and stocks have to increase. Increasing one at the expense of the other will not stabilize prices. Excess capacity exists in the oil producing countries. Stocks exist in the oil consuming countries. Therefore, only interdependence and cooperation can enhance energy security.
Interdependence And Cooperation
The focus of some countries on eliminating dependence on oil imports does not enhance energy security. These countries’ energy security is nested in interdependence and cooperation, not isolation and self-sufficiency. In fact, if other countries thought in the same way about their dependence on imports from the oil-consuming countries, several industries would suffer. For example, if other countries thought about dependence on India’s IT industry the same way India’s politician think of their dependence on imported oil, India’s economy would plunge into the abyss within a few months.
The rush by some countries to build petroleum strategic reserves will not enhance energy security if these reserves replace commercial stocks. Data from the US indicate an inverse relationship between strategic stocks and commercial stocks. Therefore, increasing the size of government-owned stocks has not enhanced energy security. Instead, it has jeopardized the economic and social dimensions of energy security. It subsidizes the rich oil companies indirectly by reducing the cost of holding commercial stocks.
While low oil prices are not good for the oil producing countries, they are not good for consuming countries either. Low oil prices increase consumption, increase dependence, choke off alternative energy resources, increase wastage, and increase pollution. In other words, while low oil prices contribute positively to the economic dimension of energy security, they destroy the remaining dimensions. Since both producing and consuming countries suffer, only interdependence and cooperation can eliminate this suffering. The same argument can be made when oil prices are high.
Conclusions
No energy policy is complete without focusing on energy security. A discussion of energy security is useless without understanding its meaning and measuring and assessing it. The contradictions between the concept of energy security and the actions of consuming countries and their oil companies and the call by the top political leadership in these countries to eliminate dependence on foreign oil imports indicate that most politicians do not know what energy security is. Even if they are aware of its meaning, they lack the measures needed to assess energy security. Most emerging economies do not have the data required to build such measures.
This article provided a general framework in which it identifies six dimensions of energy security. The critical problem is the lack of timely data to measure and assess energy security situation in most consuming countries. Without measurement and assessment, decision makers cannot make the correct policy recommendations to avoid an energy crisis.
While energy independence might improve some aspects of energy security, it does not shield the country from energy shocks. The petroleum market is global. Any shortage in any part of the world will increase petroleum prices worldwide. Therefore, policy makers in the consuming countries can enhance energy security by fostering interdependence rather than agonizing about dependence.
To improve its energy security, a country needs to collect relevant, up-to-date data, measure the various dimensions, and assess energy security. Only then can policy makers make informed decisions and protect their country from future energy crises. Keep in mind that even a correct policy will not be effective if it contradicts another policy response. Policy responses must be integrated in a way that maximizes energy security. The experience of the consuming countries in the last four years indicates that policy makers can enhance the economic dimension of energy security through the implementation of a combination of fiscal and monetary policies. While a free energy market is among the best tools to enhance energy security, the government can pursue policies that can improve market competitiveness and correct for market failures. The social dimension of energy security might require the government to intervene to reduce the energy gap between the rich and the poor. Fear of oil shortages might also force the government to build strategic petroleum reserves. Building strategic oil and gas reserves to be used during energy shortages is an effective tool only if strategic reserves do not replace commercial stocks.
In conclusion, I offer the following definition of energy security, which encompasses the above six dimensions and interdependence: The steady availability of energy supplies in a way that ensures economic growth in both producing and consuming countries with the lowest social cost and the lowest price volatility.