Global Energy Governance: The New Rules of the Game available in Paperback
Global Energy Governance: The New Rules of the Game
- ISBN-10:
- 0815703430
- ISBN-13:
- 9780815703433
- Pub. Date:
- 01/11/2010
- Publisher:
- Rowman & Littlefield Publishers, Inc.
- ISBN-10:
- 0815703430
- ISBN-13:
- 9780815703433
- Pub. Date:
- 01/11/2010
- Publisher:
- Rowman & Littlefield Publishers, Inc.
Global Energy Governance: The New Rules of the Game
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Overview
Much of the existing discourse on energy governance deals with hard security issues but neglects the challenges to global governance. Global Energy Governance fills this gap with perspectives on how regulatory institutions can ensure reliable sources of energy, evaluate financial risk, and provide emergency response mechanisms to deal with interruptions in supply.
The authors bring together decisionmakers from industry, government, and civil society in order to address two central questions:
•What are the current practices of existing institutions governing global oil and gas on financial markets?
•How do these institutions need to adapt in order to meet the challenges of the twenty-first century?
The resulting governance-oriented analysis of the three interlocking trends also provides the basis for policy recommendations to improve global regulation.
Contributors include Thorsten Benner, Global Public Policy Institute, Berlin; William Blyth, Chatham House, Royal Institute for International Affairs, London; Albert Bressand, School of International and Public Affairs, Columbia University; Dick de Jong, Clingendael International Energy Programme; Ralf Dickel, Energy Charter Secretariat; Andreas Goldthau, Central European University, Budapest, and Global Public Policy Institute, Berlin; Enno Harks, Global Public Policy Institute, Berlin; Wade Hoxtell, Global Public Policy Institute, Berlin; Hillard Huntington, Energy Modeling Forum, Stanford University; Christine Jojarth, Center on Democracy, Development, and the Rule of Law, Stanford University; Frederic Kalinke, Department of Politics and International Relations, Oxford University; Wilfrid L. Kohl, School of Advanced International Studies, Johns Hopkins University; Jamie Manzer, Global Public Policy Institute, Berlin; Amy Myers Jaffe, James A. Baker Institute for Public Policy, Rice University; Yulia Selivanova, Energy Charter Secretariat; Tom Smeenk, Clingendael International Energy Programme; Ricardo Soares de Oliveira, Department of Politics and International Relations, Oxford University; Ronald Soligo, Rice University; Joseph A. Stanislaw, Deloitte LLP and The JAStanislaw Group, LLC; Coby van der Linde, Clingendael International Energy Programme; Jan Martin Witte, Global Public Policy Institute, Berlin; Simonetta Zarrilli, Division on International Trade and Commodities, United Nations Conference on Trade and Development
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Product Details
| ISBN-13: | 9780815703433 |
|---|---|
| Publisher: | Rowman & Littlefield Publishers, Inc. |
| Publication date: | 01/11/2010 |
| Edition description: | New Edition |
| Pages: | 386 |
| Product dimensions: | 6.00(w) x 8.90(h) x 1.10(d) |
About the Author
Read an Excerpt
Global Energy Governance
The New Rules of the GameBrookings Institution Press
Copyright © 2010 Brookings Institution PressAll right reserved.
ISBN: 978-0-8157-0343-3
Chapter One
The Role of Rules and Institutions in Global Energy: An IntroductionAndreas Goldthau and Jan Martin Witte
Current public policy debates on energy security are characterized by a sharp focus on questions regarding access to resources and associated geopolitical and geoeconomic challenges. China's new "scramble for Africa" has already become the stuff of legend; access to the gas resources of the Caspian Sea region is the subject of extensive geopolitical scheming; and the race for the presumed resource wealth of the Arctic has begun in earnest.
This focus on the geopolitics of energy is rooted in the deep fears of consumers about security of supply, leading them to put strong pressure on policymakers to come up with effective fixes. In the United States, where during 2008 gas prices that briefly reached US$4 a gallon created a jittery political climate, energy independence emerged as a top issue in the recent election campaigns and will continue to play a prominent role on the agenda of President Obama's administration. In Europe, where consumers are more accustomed to consistently high energy prices, the debate has long been less shrill. However, high imports of Russian natural gas, combined with dwindling resources at home, have created a volatile political environment and have fueled fears of an energy weapon, with Russians and Europeans trading not just gas but also, increasingly, accusations. Russia's violent forays into Georgia in 2008 and the unresolved Russian-Ukrainian energy disputes have further heightened tensions over crucial Eurasian transit routes. The more recent slackening in oil prices, and the global financial crisis, may take energy issues off the top of the political agenda for a time but will certainly not do so for long.
Oil and gas have always been politically charged commodities, as they have been (and will continue to be for decades to come) the primary sources of global energy supply. Oil is forecast to remain the single largest element in the primary fuel mix, supplying an estimated 30 percent of global energy until at least 2030. Gas, which accounted for 21 percent of energy on the world market in 2006, will increase its share to an estimated 22 percent by 2030. The world's total primary consumption is expected to increase by 45 percent during that same period. Thus for consumers reliable access to oil and gas at a reasonable cost will continue to be of prime strategic value and consequently subject to significant government intervention. For producers, oil and gas are often dominant sources of state revenues and thus key growth engines for their economies.
However, this lopsided attention to the geopolitical dimension of energy security is based on the myopic and erroneous presumption that global energy politics is necessarily a zero-sum game, in which one country's energy security is another's lack thereof. This preoccupation deflects attention from some key issues that policymakers need to consider in their attempts to establish effective global energy governance: first, the central role played by increasingly international (in the case of oil, thoroughly global) energy markets in balancing demand and supply; second, and even more important, the significance of the rules of the game-national as well as international-that structure these markets. These rules of the game-that is to say, the institutional architecture that underpins global energy-govern central aspects of financing, trading, and hedging oil and gas ventures via financial markets, investment treaties, and trade agreements. These rules also address short-term supply risks in the event of market failure or disruption.
Rather than focusing exclusively on the supply side and thus the geopolitical dimension of energy security, it is imperative for researchers and policymakers to broaden their perspective and assess whether and to what extent the existing institutional architecture of global energy needs to be reformed in response to three major trends: first, rapidly changing framework conditions, driven above all by the rise of new consumers such as China and India; second, the growing relevance of state players in oil and gas markets; and third, emerging regional and global climate mitigation regimes.
This book makes a first attempt to apply such a broader perspective by identifying and analyzing the important role that rules and institutions play in determining outcomes in international oil and gas markets, by examining how current trends are affecting the existing rules of the game, and by highlighting the consequences for public policy.
Why Markets and Rules Matter in International Oil and Gas
Current public policy debates on energy are shaped primarily by geopolitical and mercantilist frameworks. Typically, international energy policy is portrayed as being fashioned by states that compete for resources and are thus locked into a competitive struggle with zero-sum outcomes. This state-centered perspective not only neglects the fact that market forces matter in international oil and gas, it also ignores the fact that during the past three decades market forces have assumed a position of prime importance in determining outcomes in global energy, driven by reforms that were in many cases demanded by producers and consumers alike.
Already in Place: A Liquid and Competitive Global Market for Oil
Since the late 1970s international oil markets have been fundamentally transformed. One important consequence of these transformations is the existence of a liquid, competitive, and truly global market for oil. Before the first oil shock in 1973 international oil markets were dominated by the internal trading schemes of the major Western oil companies that had concessions in oil-exporting countries. Alongside these arrangements, though less prominently, ran state-to-state deals between consumer and producer nations. As a result, most of the globally traded oil was bound up in long-term bilateral contracts, resulting in low liquidity in international markets. These bilateral contracts were drawn up in an era during which supply cutoffs were simply not expected and rarely materialized (the few exceptions included the closing of the Suez Canal in 1956 and the embargo on Iranian oil exports in 1967 after the nationalization of the Anglo-Iranian Oil Company by the shah).
The oil shocks of the 1970s fundamentally changed the rules of the game in international oil. Consumers found themselves facing tremendous difficulty in replacing oil supplies lost as a result of the 1973 embargo and the political turmoil in the Persian Gulf region at the end of the decade. In the immediate aftermath of the 1973 crisis (compounded by the removal of U.S. import quotas by the Nixon administration), finding alternative sources proved complicated and costly. While oil market conditions eased significantly in the late 1970s, consumers had, for the first time in history, seen the effective application of the oil weapon by producer nations. This perceived vulnerability also triggered the sense that a forum for consumers was needed for effective information sharing and emergency coordination in response to supply shocks.
Thus in the aftermath of the oil shocks, consumer nations of the Organization for Economic Cooperation and Development (OECD) created emergency sharing mechanisms and combined forces in the International Energy Agency (IEA). At the same time, oil exporters' efforts to nationalize domestic production not only deprived Western Big Oil of concessions and hence access to reserves, it also broke up the vertical integration of the industry and, as a consequence, deprived the newly created national oil companies (NOCs) of refining and retail outlets in importing markets. This process had dramatic results, significantly increasing the fungibility of crude oil and thus helping to create a virtual global pool of oil that made price formation more transparent and predictable. In fact it marked the starting point of large-scale liberalization of the global oil market. This push toward liberalization was at least tolerated by some of the producer countries (most notably Saudi Arabia), which hoped to attain a higher degree of control over government budgets that were highly sensitive to fluctuating oil prices. While admittedly driven by market forces rather than government design, this process also resulted in the creation of spot oil markets in New York and London and of oil futures contracts (paper oil), thereby crafting a new oil world no longer depending on bilateral long-term contracts. In turn, the liberalization of international oil generated major efficiencies, facilitated the development of new supplies, and fostered price competition.
The liberalization of international oil markets proved spectacularly effective. Today the bulk of oil is traded on exchanges or at least under relatively short-term contracts whose prices are linked to prices on the commodity exchanges. In that it has become "visible." A certain amount of oil produced remains bound in long-term contracts and bilateral deals. Yet even if it is assumed that only 50 percent of all globally produced oil is subject to market mechanisms, that amounts to more than 40 million barrels a day being currently traded under open-market schemes. Thus there exists a liquid, global market at volumes that exceed the markets of almost all other commodities-in terms of physically traded volumes as well as derivatives.
The existence of a global and liquid market for oil has several important consequences. First, it makes effective oil embargoes literally impossible. Therefore talk about the oil weapon, which has recently come back into fashion, simply does not make sense. Once oil is sold on the global market, no producer can control where and to whom it goes. Also the extensive strategic reserves developed by most consuming nations in recent decades effectively reduce the potency of potential disruptions. Second, given the competitive forces to which the global oil market is subject, price stability through national or even international policy intervention is an unattainable goal. A case in point is OPEC's repeated failure in its attempt to steer global production and, with it, prices. That does not mean that betting on price levels may not force oil prices up or down in the short term. It does mean that the global price for oil is first and foremost a function of market forces and cannot be artificially lowered or increased by policy design in the long term. In fact, attempts to manipulate price levels or otherwise influence the global oil market will prove inefficient and, as demonstrated on occasion, even counterproductive.
In the Making: A Global Market for Gas
To date, primarily as a result of transport based on pipelines, natural gas has remained mostly a regionally traded commodity. Major markets are by and large geographically restricted to Eurasia, North America, and the Asia-Pacific region. As a consequence, markets for gas have been slower to liberalize, with the bulk of supply contracts remaining long term in nature. While major consumer markets, in particular the United States, have liberalized, much gas trading, notably in Eurasia, remains tied to long-term bilateral deals characterized by destination clauses and prices indexed to a gas substitute, most commonly oil.
However, recent years have begun to see a global market for gas in the making, driven primarily by the expanding role of liquefied natural gas (LNG). Falling indigenous supplies of natural gas, combined with rising demand, falling costs, and enhanced technologies for the liquefaction of gas, are turning LNG into an increasingly attractive, indeed necessary, alternative source of energy, particularly in Europe. True, the recent economic slowdown has yet again turned the European market into a buyers' market, while recent discoveries of unconventional gas have helped to slow down the need for increased LNG imports into the United States. Yet the widely expected gas glut in Europe may turn out to be rather short-lived once the economy picks up again-and particularly if the EU is to comply with its ambitious climate goals. In the liberalized U.S. market, depending on evolving cost structures, LNG may still play an important role in gas-to-gas competition.
For consumers, LNG both helps diversify sources of supply (thereby fostering energy security) and contributes to price competition in gas markets (since price arbitrage is possible across different, previously disconnected regions). On the basis of recent trends the IEA projects that by 2010 up to 20 percent of demand for gas in the OECD countries will be met by LNG. In fact it is believed that LNG will account for 80 percent of the increase in interregional trade up to 2030.
Clearly, a truly global market for gas does not currently exist and will take time to develop fully. In addition, as is argued in further detail in this book, a global gas market will not have the same characteristics as the global market for oil. Cost structures in the two industries are fundamentally different; the costs of liquefaction, transport, and regasification will remain significant, despite technological advances; and in contrast to oil, gas deteriorates over time, rendering storage difficult. In consequence, even an internationalized market for gas is likely to remain dominated by long-term contracts. Yet the natural gas business is in flux and is likely to further integrate in the years to come. In this context, the rise of LNG may fuel the development of spot markets for gas (already operating, albeit on a fairly small scale) and thus provide an additional buffer for consumers, who may be confronted with unexpected supply disruptions triggered by political or other events.
No Markets without Institutions: The Rules of the Game
Thus despite all the talk about access and the often-invoked specter of supply disruptions, it is important to recognize that both oil and gas are commodities that are already (in the case of oil) or increasingly (in the case of gas) traded on a global scale. Market forces of demand and supply, mediated by the price mechanism, are key factors in determining levels of investment in, as well as the production and consumption of, oil and gas.
But it is equally important to recognize that these markets, like any others, do not function without institutions. Following a definition developed by Douglass North almost two decades ago, institutions can be defined as the rules of the game according to which actors play. Institutions are composed of formal rules (laws, regulations) and informal constraints (norms, conventions) and usually embrace some form of enforcement mechanism. The study of institutions is based on the recognition that markets would work perfectly only in the absence of transaction costs. As we do not live in such an ideal world, institutions are crucial in order to lower transaction costs and to set incentives for market participants to compete on price and quality.
A comprehensive typology of institutions in energy markets is beyond the scope of this volume, but in brief, institutions can be classified according to various principles, for example by source (public, private, or public-private), enforcement mechanism (on a continuum from legal fiat to voluntary compliance), and function (what they do or are supposed to do). For the purpose of this volume, we set out a functional categorization of institutions in global energy markets and use it as a purely heuristic device to highlight and emphasize the important role these institutions play in making energy markets tick. On the basis of such a functional categorization, institutions in international energy markets can be grouped into three types.
First, some institutions are designed to correct market failures. International oil and gas markets are no nearer perfect than any other market structure. As a prime example, and as also discussed in further detail in this volume, following the 1973-74 oil price shocks major energy-consuming nations established the IEA. In addition to acting as a source of energy market statistics, the IEA introduced distinct rules for two specific mechanisms of short-term supply (risk) management: the International Energy Program (IEP, founded in 1974, which established national emergency oil stocks among members) and the Coordinated Emergency Response Mechanism (CERM, founded in 1979). The linchpin of the framework is the reserve system of IEA member states, maintaining mandatory emergency oil reserves (strategic petroleum reserves, or SPR) equivalent to at least ninety days' worth of their respective oil imports. The SPR enables a stock draw-the release of reserves-during a crisis, producing barrels immediately, with a simultaneous calming effect on global prices.
(Continues...)
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