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Feature
What Is Energy Security?
( Part V)
Economic Reserch Council
By
A F Alhaji
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.
Middle
East Economic Survey, VOL. LI, No 2, 14-January-2008
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.
LI, No 2, 14-January-2008.
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 fith 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, the
second on 04 November, the third on 11 of
November, and the
forth on December, 30th.
The remaining one will be published in future weeks. Petroleumworld
reprint this article in the interest of our readers.
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