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What Is Energy Security? ( Part III)

Economic Reserch Council

By A F Alhaji

Difficulties And Challenges

The energy literature and numerous statements by officials of oil-producing and oil-consuming countries indicate that the concept of energy security is elusive. Definitions of energy security range from uninterrupted oil supplies to the physical security of energy facilities to support for bio-fuels and renewable energy resources. Historically, experts and politicians referred to “security of oil supplies” as “energy security”. Only recently policy makers started worrying about the security of natural gas and LNG supplies.

The literature is divided between those who believe that energy security is a real issue in response to which governments have to devise polices, and those who believe that energy security is “an empty concept used to perpetuate bad, self-serving public policy.”1 Even though there may be some truth in them, the claims of the first group do little to define the concept of energy security. Instead, they add to the confusion and raise more questions. For example, should governments intervene in energy markets to ensure energy security? Or should they adopt other policies in which they leave energy security to market forces, since markets are more efficient in allocating resources than governments? Experts who believe in government intervention do not agree on how and why. Experts who believe in market forces do not agree whether governments should interfere during energy crises or not. They also do not agree on the extent to which government should become involved in the promotion of competitiveness in energy markets. Therefore, it is difficult to find a clear definition of energy security in the literature. It is also challenging to draft one.

Is Energy Security For Consuming Countries Only?

Historically, researchers and politicians have limited the concept of energy security to consuming countries. However, the concept has evolved in recent years. Several major drivers have convinced experts and policy makers that energy security is the responsibility of both consumers and producers. These drivers include political unrest and violence in several oil producing counties, the increased cooperation between oil-producing and oil-consuming countries, international and multinational oil companies’ investment in the oil-producing countries, the politicization of capacity expansion in the oil producing countries, the reserves-booking controversy, and the possibility of an oil production peak in some oil producing countries.

Politicizing The Concept Of Energy Security

Nothing hurts energy security more than politicizing it. The differences in opinion cited above make the concept of energy security diverse and elusive. However, a quick review of the energy security literature indicates that the division among experts cuts along political and philosophical lines. Therefore, any definition of energy security is self-serving, even for those who believe that it is an “empty concept”.

The Saudis once defined energy security as “maintaining and enhancing access to where the oil exists in such obvious abundance.”2 In this case, “obvious abundance” refers to Saudi Arabia since it has the largest reserves in the world and the lowest extraction costs. Some members of the US oil industry have their own views that serve their interests: “US energy security is best maintained by ensuring that the United States is, and is perceived to be, supportive of free trade and of the use of market forces on global scale.”3 The oil industry does not like heavy-handed governments. They like less regulation, fewer trade barriers, and lower taxes.

The Bush administration’s view is summed up in the title of its 2001 energy report, “Reliable, Affordable, and Environmentally Sound.”4 Almost all OECD countries have designed their energy policies around three dimensions: security of supplies, the environment, and economics.5 However, the statements and actions of various countries indicate that there is more to the concept of energy security than these three dimensions.

To reach an acceptable concept of energy security, researchers and policy makers have to think about it within the framework of energy security vs energy insecurity, independence vs interdependence, energy security vs reciprocal energy security, energy security vs national security, energy security vs economic security, energy security vs environmental security, foreign investment vs formalization of dependence, secure areas vs insecure areas for imports and investments, market prices vs administered prices, and high prices vs low prices. Researchers must also investigate the link between energy policy and other policies and decide whether energy policy, and therefore, energy security, is a subset of economic, environmental, foreign, and social policies or a policy of its own. Regardless, it is very clear that every nation needs some form of integration among these policies to achieve energy security, especially given that policy contradictions are among major threats to energy security.

Economic And Political Dimensions

To avoid the political fault lines that divide the various concepts of energy security and to gain a deeper understanding of energy security, it might help to understand the relationship among energy security, energy crisis, and the various threats to energy security. Energy insecurity does not mean energy crisis, and it does not necessarily lead to an energy crisis. The existence of threats to energy security increases the risk of an energy crisis, but does not necessarily lead to one.

An energy crisis is “a situation in which the nation suffers from disruption of energy supplies accompanied by rapidly increasing prices that threaten economic and national security.”6 Therefore, an energy crisis has two elements: a decline in GDP growth, usually a recession, and a threat to national security. While the first element is very clear and can be measured, it is difficult to determine the second or to measure it. Does a threat to national security means a reduction of energy supplies needed to fight a war or defend a country against foreign aggression? Or does it mean restrictions on foreign policy options? The US considers any decrease in oil exports that limits US foreign policy options to be a threat to national security. For example, a decrease in Nigeria’s oil exports might limit US foreign policy options in dealing with the current government of Iran. If the US has four ways to deal with Iran’s nuclear program, the fact that Iran is a major oil producing country might limit the US options to two. This reduction in options is viewed as a threat to national security even if the US does not act on it. The question is, can other countries such as China, India, and Japan use this concept? If not, then what is the connection between energy security and national security for these countries? Will the call for “energy independence” in those countries have less merit than the call for it in the US?

The concept of energy security remains unclear even if we strip it of its national security dimension. Some experts define energy security as a “reliable and adequate supply of energy at reasonable prices.”7 The term “adequate supplies” is very clear: it means “uninterrupted supplies.” But what are “reasonable prices”? Are they from the consumers’ point of view or producers’ point of view? In fact, the only way that reasonable prices can enhance energy security is when they are high enough to guarantee adequate return on investment for oil producers and low enough to stimulate economic growth in the oil consuming countries. Low oil prices are as dangerous to energy security as high prices.

Experts who believe that market forces are the best guarantee for achieving energy security say that considerations of reasonable prices should not be part of the equation, especially given that prices, high or low, are the results of these forces. In fact, it is unclear how “reasonable prices” can enhance energy security when most OECD countries impose hefty taxes on petroleum products.

Thus, the only clear dimension of energy security is the economic dimension. But what about the other dimensions? Can the principles of energy security that various OECD countries employ help us understand the concept of energy security? Almost all industrial countries, especially the US, base their energy policies on four principles:

Diversity of energy supplies

Diversity of oil imports

Reduced dependence on Middle Eastern oil

Low oil price volatility

The above principles show that policy makers have historically limited the concept of energy security to oil. This should not come as a surprise since oil is the most tradable energy resource. However, the increased trade in natural gas and LNG has already brought those two commodities into recent discussions of energy security, especially after the cut-off of Russian natural gas to Europe and the expected increase in LNG trade.

“Reasonable Prices” Or “Price Stability”?

Unique about the principles of energy policy above is that they focus on the availability and vulnerability of supplies, but do not consider “reasonable prices.” Rather, they consider price volatility. Low price volatility, while appearing to be a straightforward concept, requires “reciprocal energy security.” The only way to lower price volatility is through cooperation between energy-exporting and energy-importing countries to ensure security of supply and demand simultaneously. Reciprocal energy security implies paying a fair price for the resource so producers can continue to invest and production grows to meet rising demand. In other words, “low oil prices” or “reasonable prices” from the consumer’s point of view will not ensure steady supplies and will increase price volatility. All these principles apply to European and Asian countries, with certain differences. For example, Asian countries may wish to maximize their energy security through diversification of oil imports, but their location may force them to diversify regionally but not globally. In other words, imports from the Middle East will be an integral part of their energy policy. Geography limits their goals of “energy independence”.

The above mentioned four principles ignore several important issues that have become the focus of energy policies around the world such as the environment, energy poverty, the energy gap, and social tensions between the energy rich and the energy poor.

Threats And Energy Security

Threats to energy security can help us clarify further the concept energy security. These include the use of oil weapon by one or a group of oil producing countries. In this case, even countries that are not the target of such a weapon will experience higher oil prices. An embargo that targets the US, for example, will have a limited impact on other countries. But if that embargo is associated with a production cut, other countries will suffer as much as the US, or maybe more if they cannot afford to pay the highest price in the market. In a global oil market, supplies will go to the highest bidder.

Threats also include a sudden peak in world oil production, government intervention, and conflicts among various government polices. Price controls distort the relationship between supply and demand and might lead to shortages.

Contradictions among government policies might sometimes favor, for example, a foreign policy that leads inadvertently to energy shortages. In fact, one of the main weaknesses of the energy security literature is the lack of discussion regarding the impact of contradictory policies on energy security. Other weaknesses include the lack of discussion regarding the interactions among various dimensions of energy security and the weight of each dimension of energy security in the formulation of energy policy.8

1. From a presentation by Vito Stagliano, Deputy Assistant Secretary of Energy for Policy Analysis during the first Bush Administration, at the Energy and National Security in the Twenty-First Century conference in 1995. The Institute for National Strategic Studies, National Defense University.

2. A statement by Hisham Nazer, the former Saudi Arabian Minister of Petroleum and Minerals Resources, at the 60th annual meeting of the independent Petroleum Association of America in San Antonio on 31 October 1989.

3. A statement by long-time Amoco vice President John Lyman at the Energy and National Security in the Twenty-First Century Conference in 1995. The Institute for National Strategic Studies, National Defense University.

4. The report is posted on the White House web site at: http://www.whitehouse.gov/energy/index.html

5. The infamous Japanese 3 Es are: Energy security, Environmental protection, and Economic efficiency.

6. Williams, James, and A F Alhajji “Parallels with earlier energy crises underscore US vulnerability to oil supply shocks today?” Oil and Gas Journal, Vol 101, No 5, February 2003.

7. See, for example, “RIS Background Paper on India’s Energy Security” conducted by the Center for Research and Information System for Developing Countries, an Indian government backed organization.

8. For discussion on the impact of contradictions of US foreign, environmental , economic, and energy policies on the world oil market see A F Alhajji, “US Energy Policy Contributed to Lower Oil Prices”, World Oil, Vol 220, No 11, November, 1999.

A F Alhajj is an energy economist and associate professor at the College of Business Administration, Ohio Northern University (a@a-alhajji.com). This is the first of five articles on the theme of energy security by Prof Alhajji. The remaining four will be published in future weeks.

Editor's note: This article was originally written for Middle East Economic Survey
(MEES) and publish by MEES, VOL. L, No 45, 5-November-2007. 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. This is the third of five articles for MEES on the theme of energy security by Prof Alhajji and re-publish by Petroleumworld. The first was published on 27 October and the second on 04 November. The remaining two will be published in future weeks. Petroleumworld reprint this article in the interest of our readers.

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