Safeguarding oil security

mariaBy Maria van der Hoeven, Executive Director, International Energy Agency

Energy security has been the primary mission of the International Energy Agency (“the Agency”) since its founding in 1974, following a major oil crisis. Indeed, the Agency was created to provide a framework in which IEA countries could defend their interests as key oil consumers. While that mission has since diversified across the fuel spectrum, oil remains the dominant energy source globally, and oil supply security remains a core responsibility of the IEA. And yet over almost 40 years, how we define and address that responsibility has developed considerably. Taking a wider view of energy and oil security is particularly important given the significant shifts that we are now seeing in the oil market—in terms of rapidly growing emerging market demand, but also in terms of new supply patterns all along the value chain.

Energy security refers to the ability of a given country to obtain uninterrupted availability of its main energy sources at an affordable price. In the short term, energy security is the ability of a given energy system to react promptly to sudden changes in supply and demand, maintaining the availability, affordability, accessibility and quality of energy. Long-term energy security is linked mainly to making timely investments to ensure that the future supply of affordable energy will support economic development and environmental goals.

Photo credit:

Traditionally, the IEA put a strong emphasis on mitigating the risks and effects of energy supply disruptions, particularly within oil markets. Coordinating the use of emergency oil stocks in the event of disruption is a well-known tool, but only one. Analysis to boost transparency in global oil markets, active participation in the Producer- Consumer Dialogue with OPEC and other major producers, and efforts to improve statistical openness, timeliness and accuracy through the Joint Organisations Data Initiative all help to reduce the risk of disruption. At the same time, the IEA’s tool-kit to respond to acute disruptions goes beyond emergency oil stocks, to include demand restraint and fuel-switching measures.

Another important characteristic emphasised by the IEA is resilience—the ability of energy systems to mitigate or withstand disruptions, including in the oil market. Regular emergency response reviews of IEA member countries report on systemic strengths and vulnerabilities of national energy security policies, procedures and infrastructure, and the IEA’s Model of Short-Term Energy Security (MOSES) measures both risk and resilience factors for comparison across countries and across fuels.

Yet while the traditional focus on supply disruptions remains important, major changes in the global energy economy since 1974 have required our conceptions of oil security (and energy security more broadly) to adapt. When the IEA was created, the oil market was based on longterm contracts and a stable relationship between suppliers and refiners. That has changed with the globalisation of oil markets, the importance of the spot
market, and the development of highspeed information flows. Concerns about supply security of other fuels like gas and electricity, and also the interplay between fuel markets, has broadened the focus of energy security. And indeed, we are defining energy security to include long-term concerns, like creating the conditions for sufficient investment and promoting energy access to boost living standards and economic development. We also recognize the linkage between sustainability and energy security—they are two sides of the same coin. Not only do low-carbon technologies help reduce import dependence and diversify the fuel mix, but recent IEA discussions have highlighted the adverse impact of climate change on energy infrastructures. All of this helps to change the nature of the energy security debate.

Perhaps the most significant change is a shift in the global energy map, and specifically the global oil map. Where OECD countries accounted for more than three-quarters of oil consumption in 1974, they will soon account for less than half. The economic rise of emerging markets like China and India have signalled a global economic rebalancing, including within energy markets. IEA analysis shows growing non-OECD demand, particularly in China, to continue over time.

Meanwhile, oil demand in Europe and the U.S. is stagnating or falling. That reality is the driver behind IEA efforts to engage with key partner countries in many areas, but particularly with regard to oil security. For several years, we have supported countries like China, India, ASEAN countries, and others in their efforts to improve emergency response measures and in some cases to build their own emergency oil stocks. That has included technical support, those countries’ participation to regular IEA emergency response exercises (EREs), and unique tailored EREs in Thailand and India. Going forward, the IEA is working to develop a framework for cooperation with countries outside the IEA in the event of a disruption.

But the shift of the oil map does not just mean the rise of Asian demand, particularly looking forward. Our forecast of the oil market reveals a medium-term future marked by uncertainty, uneven supply and demand changes, and the potential for technological gamechangers. That kind of volatility means a very different oil security environment, and one that requires both broad engagement and nimble response.

Despite volatility on both the supply and demand side, we have seen continued market tightness and consistently high prices thanks to contradictory forces at play. The economic recovery is stagnating. OECD countries suffer from persistent debt concerns, notably in the euro zone, and there are signs that even China is slowing. On the supply side, continued political upheaval in the Middle East and North Africa disrupted crude exports from several countries. Also, unplanned maintenance and technical disruptions at mature fields reached record highs last year, rekindling concerns about decline rates in aging plays. These risks are not going away, and contribute to a new “reality of risk” in the oil market.

At the same time, there is also good news on the production side. Despite events in the Middle East, the region has also seen success stories. Saudi production has surged to 30-year highs, and Iraq is also breaking production records. A special IEA report released in October 2012 highlighted Iraq’s potential as a gamechanger going forward. Production is also surpassing expectations in North America, where high prices and new technologies have unlocked light, tight resources that were long thought to be impossible to tap economically. Our 2012 World Energy Outlook predicted that the U.S. could become the largest oil producer around 2017 largely thanks to light, tight oil.

Combined with increased efficiency, we expect this overall picture to yield less-tight markets over the medium term. While that is generally good for supply security, and helps to lessen the impact of disruptions, it is no reason for complacency. In the U.S., for example, any talk about prospects for energy independence leaving room for disengagement from global markets or certain regions must be laid bare for the fallacy that it is. First of all, we project the U.S. to continue to import more than a quarter of its oil by 2035. But in any case, the oil market is global, and no matter its provenance, oil price and availability are still intricately tied with events and availability elsewhere—emphasising the need for cooperative oil security policy. And while supply may be growing globally, both supply and demand growth are exceptionally uneven, with effects throughout the market.

Most of the new supply is expected from the Americas, and most of the new demand from Asia, the Middle East, and the former Soviet Union. These twin changes have clear consequences for the midstream and downstream sectors, those often-overlooked but critical links in the supply chain. International crude trade volumes are forecast to dip, while product trade is expected to grow in both volume and scope amidst resurgent refining capacity expansion in Asia and the Middle East—and reducing capacity in the OECD. Those changing trade and product import patterns affect disruption risks, and also the paradigm for emergency oil stockholding when it comes to crude/product balances.

Given these new realities—increased uncertainty, volatility, and technological change—we recognise that international oil security governance and emergency response procedures need to react in a timely and decisive manner. We regularly review the assessment procedures for IEA collective action in response to a substantial physical supply disruption.

The important element in defining “substantial” is to analyse the potential economic impact against the backdrop of the current market. That is why there is no “one-size-fits-all” response, nor is there a specific size of disruption above which we act. It is also why the changing geographical dynamics of the oil market are so important to understand, as well as seasonal supply and demand fluctuations, refinery demand patterns, crude and product quality breakdowns, spare capacity figures, and timely commercial stock data.

For example, while the IEA used emergency stocks in 2005 in response to the U.S. disruptions caused by Hurricane Katrina against a backdrop of tight markets, it did not act at the end of 2008 when hurricanes Gustav and Ike had a similar effect against a backdrop of looser markets and a deteriorating global economic situation. When the IEA last released stocks in 2011 as a result of the crisis in Libya, the size of the disruption was comparatively small and the response was not immediate. That was because production remained shut-in as markets began to tighten seasonally thanks to rising demand in the summer. No two disruptions, and no two IEA actions, are ever the same.

The IEA’s responsibility to safeguard oil supply security has been evolving alongside major changes in the global oil economy—particularly a major and ongoing redrawing of the global oil map. As this evolution continues, so changes the nature of our mission. A broader concept of energy and even oil security means focusing on resilience and long-term challenges, as well as response. When that response is necessary, it must be quick and decisive. And critically, safeguarding oil security requires global cooperation more than ever before.

Previously published in the World Petroleum Council’s 80th Anniversary Publication, Jan./Feb. Republished with permission.

Facebooktwitterredditpinterestmailby feather

Leave a Reply

Your email address will not be published.