Ensuring our energy future

As the volatility associated with world energy prices continues and global energy demand shows no sign of abating, politicians, bureaucrats, and energy analysts are all looking for ways to ensure their jurisdictions have access to reliable supplies of affordable energy. Over the past year or so, three “principles” have been promoted as the means of achieving this goal: resilience, diversification of supply, and global interdependence.

Resilience, the first principle, is the ability to handle supply shocks of limited duration. Achieving resilience requires the jurisdiction to maintain supplies (either in the form of spare production capacity or adequate supplies in storage) and infrastructure (backup equipment and spare parts). The availability of sufficient supplies and infrastructure is intended to facilitate the jurisdiction’s return to normality. An example of resilience was the failure of the eastern-North American electricity grid in August 2003—in less than a week, most consumers had their electricity supply restored.

Energy-poor countries that do not have the luxury of excess supply or infrastructure to carry them through the period of a supply shock would soon learn that resilience is a principle reserved for developed nations. Although much of the developed world can be considered resilient because of energy-sharing agreements dictated by the International Energy Agency (which meant, for example, that the US was supplied with oil products by other IEA members for 60 days after hurricanes destroyed much of the US gulf coast refining capacity in September 2005), how well these would work during times of widespread supply shortages is anyone’s guess.

The second principle, diversification of supply, argues that for a jurisdiction to attain security of supply, its energy sources must come from more than one supplier, meaning that problems with one or more suppliers can be offset by production from others. Diversification of supply became central to the energy policies of many countries after the two “oil shocks” in the 1970s—western countries wanted to reduce their exposure to oil from Arab OPEC nations. The availability of oil from Prudhoe Bay in Alaska and the North Sea in the late 1970s allowed this to happen. Since then, the United States has made a concerted effort to obtain oil supplies from anywhere possible, and today imports crude oil and oil products from almost 50 different countries.

Diversity makes sense as long as the various suppliers can meet the demand and the consumers can pay the price set by the suppliers. Since sources of crude oil are finite, many countries that once exported oil are now reducing or even outright curtailing their exports, meaning that the number of potential suppliers is decreasing. With a shrinking pool of suppliers, diversity becomes harder to achieve. Despite attempts to reduce its reliance on crude oil from OPEC, the United States is slowly increasing the volume of crude oil imported from this organization. (Similarly, in Europe, declining production of North Sea natural gas is forcing European countries to increase their reliance on a single supplier, Russia.)

The grade of crude oil can also impact diversity as many older refineries found in western nations designed to process lighter grades of crude are unable to refine today’s heavier crudes. Countries with older refineries face the prospect of either upgrading these at great expense or purchasing crude from a limited number of suppliers.

The final principle, global interdependence, is based upon the belief that if all nations were to cooperate—rather than compete—for oil, everyone would benefit. Ideally, all nations would subscribe to this idea; however, it is unlikely that the major consuming nations would be willing to agree to such a proposal, especially if there were any potentially detrimental economic implications. The EU’s growing reliance on Russia for natural gas is presented as a successful example of global interdependence since Russia receives about 20 percent of its natural gas revenues from the EU. What is overlooked is the fact that in the recent past, Russia has used natural gas as a political tool against Ukraine, and there is nothing to stop them from using similar tactics on other countries in the future.

Proponents of global interdependence often point to China as an example of a country that doesn’t “play by the rules” because it enters into energy agreements with countries the west refuses to deal with, such as Burma and Sudan. These same proponents often overlook actions by, for example, the United States, which in 2005 forbade the sale of Unocal to the Chinese firm, CNOOC, for security reasons.

Interestingly, it isn’t just the consuming countries that don’t play by the rules—many producing countries, such as Saudi Arabia, Iran, and Venezuela, sell oil products such as gasoline and diesel fuel to their citizens for a fraction of the world price. This internal consumption is eating into the overall world supply of crude oil because the number of people under 25 years of age in many of these countries is growing rapidly, along with the desire for automobile ownership.

For the most part, the energy security principles described above are intended to maintain the energy consumption patterns of people living in jurisdictions that can afford the cost of crude oil. Resilience, diversity, and interdependence mean little if energy supplies are unobtainable.

Even in jurisdictions that can afford the rising cost of energy, policies that focus on supply without considering how the energy is used do not improve their energy security, they weaken it. Energy consumption habits that are wasteful, inefficient, or use an inappropriate type of energy mean that more energy is being expended on activities than need be—in these situations supply could be reduced if end-use consumption was reduced.

In most jurisdictions, attaining complete energy independence from the outside world is a pipe dream. However, given the volatility of today’s—and likely tomorrow’s—energy markets, jurisdictions that reduce consumption and replace imported energy with secure, preferably domestic, sources of energy will ensure the energy future of their citizens.

Atlantic Construction and Transportation Journal—November 2007