An International Approach to Energy Security

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1. The Global Context for Energy Security

There are several trends that warrant an international cooperative approach to energy security. The first is that economic growth and population gains will lead to energy demand doubling over the next 30 years, mostly in developing countries. Second, fossil fuels on current trends will continue to provide the vast majority of energy, but these resources are distributed unevenly around the world. This has contributed to a growth in global trade of energy and is the source of perceived energy insecurity.

The perception has led to confusion between energy security and energy independence. These are two different issues. Energy security, as defined by the World Economic Forum (WEF) Global Agenda Council on Energy Security (on which I serve as a council member), is the reliable, stable and sustainable supply of energy at affordable prices and at an acceptable social cost. This definition recognises that environmental and other issues are inexorably linked with those of energy. Energy security, therefore, can only be achieved efficiently through global cooperation and not isolation.

The aim, therefore, should be to constitute a much more effective international system for promoting energy security which allays anxieties about the reliability of energy supplies and is rooted in the mutual interdependence of producing and consuming nations. All nations – producers and consumers, rich and poor – must be engaged while pivotal nations should be called upon to play a leadership role.

2. The Changing International System

Any proposed international system must be cognisant of the emerging rules-based global economic system. There are growing indications of such a system, notably the formation of the World Trade Organisation (WTO) in 1995, the successor to the General Agreement on Tariffs and Trade (GATT) that governed international trade until then in the post-war period. The WTO promulgated a set of trade rules, agreed by its member states, which cover the near totality of world trade. These rules not only levelled the playing field in terms of trade liberalisation measures across nations, but also became an adjudication body to resolve sovereign disputes. Although further progress in terms of extending the coverage of its rules has faltered in the current round of negotiations known as the Doha Round, the WTO sits within an increasingly formal, as well as informal, international economic system of governance. Examples of the more informal system are the rules governing financial markets, such as the Basel standards set by the Financial Stability Forum of the Bank for International Settlements (BIS) (which has been recently reconstituted as the Financial Stability Board in the BIS in the aftermath of the global financial crisis). These financial standards are not legally binding, but countries find that it is in their self-interest voluntarily to reach the proposed levels such as for capital adequacy in their banking sectors to reassure international investors. Of course, the 2008 global financial crisis made it evident that no such voluntary or even formal regulations are perfect, but the crisis has made it more and not less urgent to constitute better governance across national borders given the growing interlinkages among markets and nations.

Any proposed international system must be cognisant of the emerging rules-based global economic system.

Although still a relatively small set as compared with existing supranational organisations such as the United Nations (UN), World Bank, International Monetary Fund (IMF), World Health Organisation (WHO), International Labour Organisation (ILO), etc. as well as the G7 (Group of 7 developed countries), G20 (Group of 20 major economies), Asia Pacific Economic Cooperation (APEC) and other groupings of countries, the shift in the global system in the past few decades is toward promoting more rules-based organisations. In other words, the complexity of the globalised economy calls for more systematic governance than that afforded by reactive ad hoc measures such as IMF bailout plans and more concrete than the communiqués issued by various forums. The 2008 global financial crisis, in which globalised capital markets linking borrower and lender countries were ineffectively governed, bears the strongest witness to this fact.

This trend toward creating a system of international economic law generates some lessons for any proposed international system governing energy policy. First, representativeness is essential to ensure that the global rules, or at least the principles agreed upon, are those that suit the interests of constituent nations. Second, as with international trade generally, global trade in energy is subject to some of the same concerns about a less-than-level playing field and therefore disproportionate bargaining power which can distort markets and prices as well as add to volatility, for example agricultural goods prices. Third, it is in the mutual self-interest of nations, both producer and consumer, to understand each other’s needs in order to reduce uncertainty regarding future demand, investment and supply, as well as to curb protectionism during economic downturns, which again has parallels with global trade. Fourth, the remarkable growth in international trade of over 9 per cent while real economic growth averaged just over 3 per cent in the post-war period attests to the benefits afforded by multilateral trade measures instead of the mostly bilateral preceding approach. Fifth, given the growing mutual interdependence of producing and consuming nations in the energy sphere, a forum that can resolve disputes in line with established rules or principles is superior to allowing countries to resolve matters bilaterally or even unilaterally. The WTO’s dispute settlement mechanism in particular has held to account countries practising protectionism even during the worst global recession since the Second World War. Finally, there are issues particularly within the energy sector, such as universal pricing of carbon, which must take place in an international setting for it to be effective.

3. An International System for Promoting Energy Security

There is no blueprint for how an international system governing energy security should take shape. It could be a set of organisations and rules, but, importantly, must be rooted in collective self-interest and practical actions. A first step is to build on the existing global organisations that promote dialogue among nations, such as the International Energy Association (IEA), International Energy Foundation (IEF), the Energy Charter and the International Atomic Energy Agency (IAEA). Second, concrete measures could be undertaken under the leadership of pivotal nations to begin to build the foundations for global cooperation. Issues that are inherently global in nature could serve as a starting point. These include universal pricing of carbon, which must be agreed in a multilateral setting to be workable. Also, collective management of strategic oil reserves as well as a multilateral nuclear fuel cycle are further actions that must be operative on an international scale to be successful for similar reasons.

An international system governing energy security could be a set of organisations and rules, but must be rooted in collective self-interest and practical actions.

This does not preclude other necessary initiatives that would require international cooperation. Two such areas highlighted by the WEF Global Agenda Council on Energy Security are as follows. First, encouraging higher investment in energy research, development and demonstration (RD & D) would be relevant not only for the energy security agenda but also ties in closely with the wider climate change imperative. Second, promoting investment in fuel supply and infrastructure would require countries not to cut back these areas during an economic downturn. Both of these aims would benefit from clearly agreed principles and have parallels in the work of the World Bank in facilitating global assistance for economic development and also the WTO, particularly in terms of the latter setting the rules that guard against countries resorting to protectionist measures which end up harming the global economy as well as their own. The parallel with general global trade is again pertinent as some of the spending by countries on RD & D as well as investing in the supply side of energy will go toward imports, which benefits the exporting country. Global cooperation and coordination would thus generate the greatest benefit.

The increasingly globalised nature of energy warrants an international system that coordinates and addresses the issues of energy security of interest to all nations. Undoubtedly, there are numerous challenges in making an international system work. The stalling of the current negotiations in the Doha Round of the WTO also provides lessons in terms of the difficulty of reconciling economic gains against losses specific to a domestic constituency. However, the trend in the globalised world is for international economic governance to play an ever larger role. Given the mutual interdependence of energy producers and consumers, and the importance of the sector not only to growth but also to environmental and other social concerns, there should be a strong imperative to move toward an international system which governs energy security so that rules or principles that establish mutually beneficial policies are known and transparent. By so doing, there is a much greater chance of achieving energy security than if nations continue to proceed largely alone.

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