The Global Energy Security Challenge

Since the Arab-Israeli wars of the late 1960s (the Six Day War) and in the early 1970s (Yom Kippur War), embargo from OPEC countries and resulting price hike, in the range of quadrupling, left the global economy descending into recession between 1973-75. The consequences of the recession were far reaching, as sluggish economic growth in the 1970s and inflation (or stagflation) left economic and social damage. Soon after the oil embargo and price hike, energy security, particularly availability and affordability of crude oil, has dominated the global energy security and macroeconomic stability agenda. The severe impact of the oil embargo by OPEC countries and the price-hike has left a serious policy question – how can global energy security be maintained and managed to shield the impact of oil shock on the economy?

Early efforts at advancing the goal of energy security around oil led to the creation of the International Energy Agency (IEA) in 1974, with the initial central goal of “helping countries co-ordinate a collective response to major disruptions in oil supply through the release of emergency oil stocks.” The IEA coordinated a series of energy security policies, including strategic reserve management, in Western Countries, shielding their economies from subsequent oil disruptions. In more recent years, with cooperation of OPEC in oil market stability and growing interest in maintaining stable global macroeconomy, the objective of IEA shifted to broader ideals such as “energy security, economic development, environmental awareness and engagement worldwide.” The concept of energy security is also expanded to other energy commodities, such as coal and natural gas, and continues to evolve towards the entire energy system, as it should.

18 0

5000 10000

1971 1973 1975 1977 1979 1981 1983 1985 1987 1989 1991 1993 1995 1997 1999 2001 2003 2005 2007 2009

Biogasoline (ktoe) Biodiesels (ktoe) Other liquid biofuels (ktoe) Crude oil ('000 bbl/day)

Countries that did not participate in IEA framework pursued their own energy security strategies. For example, the successful Brazilian model of diversification after the global oil shock brought indigenous sources of energy, particularly in the transportation sector, in greater play in Brazilian society. Review of data from 1971 (pre-crisis) to 2010 for biofuels in Brazil (see Fig. 12) reveals that Biogasoline and other liquid biofuels increased sharply in the post-crisis period, largely to the concerted fuel diversification strategy pursued.

Figure 12: Biofuels and crude oil production of Brazil: 1971-2010.

Source: Based on data from IEA. Crude oil data source is US EIA.

The effort only intensified over the decades, taking new momentum in the last decade (2000s), perhaps due to sharp rise in oil prices yet again in recent years. In fact, biofuels production in Brazil peaked after the 2009 spike in oil prices. The production of crude oil since the 1970s, at a growing rate, seems not to have deterred the increasing diversification of fuel in Brazil to enhance security.

While the oil crisis in the 1970s spurred policy and regulatory reform and new management schemes to stabilize energy markets locally, the resurgence of rapid price increases in energy commodities has initiated concern about the state of the global energy security. This concern is well placed, as prices shifts within an increasing quantity of energy commodity consumption can cause macroeconomic impacts that can be far-reaching.

Consumption of liquids, natural gas and coal have surged (see Fig. 13), particularly in liquids, coal and natural gas, along with renewables. The demand pressure on energy sources has largely led to sharp increases in energy prices in recent years.

Figure 13: World energy consumption in quadrillion Btu.

Source: Based on data from US EIA, International Energy Outlook, 2011.

0.0 50.0 100.0 150.0 200.0

1990 1991 1992 1993 1994 1995 1996 1997 1998 1999 2000 2001 2002 2003 2004 2005 2006 2007 2008 2009 2010 2011 2012

Liquids Natural gas Coal Nuclear Renewables

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Figure 14: Crude oil price trends.

Source: World Bank Commodity Price Data (Pink Sheet) 1960-2011, and US Energy Administration for 2012 data.

Note: Except for Crude Oil (Petro) average, all prices are in real 2005 dollars.

The price of crude oil (Petro, Brent, Dubai and WTI⁷) has all increased rather gradually until 2000 (bar the oil crisis of the 1970s and 80s), but particularly since 2008 prices per barrel in excess of $80 has become a norm, in subsequent years, exceeding $100/bbl (see Fig. 14). This phenomenon of price volatility and surge reduces energy affordability, one tenet of energy security. The burden on the global economy, particularly to the economy of developing countries is palpable. A decade-by-decade analysis of the price shifts reveal that oil prices were indeed declining before the 1970s oil crisis, only to increase by nearly 3,000% in the 1980s, but receding in the 1990s, and slightly increasing from 1990 to 2000. In the 2000s, though the price hike is not as detrimental as the 1970-1980 decade, has nonetheless broke from norm and increased sharply, by nearly 170% (see Fig. 15).

7 WTI is the West Texas Intermediate crude oil.

0.00 20.00 40.00 60.00 80.00 100.00 120.00

1960 1963 1966 1969 1972 1975 1978 1981 1984 1987 1990 1993 1996 1999 2002 2005 2008 2011

Crude Oil (Petro) Average ($/bbl)

Crude Oil (Brent) ($/bbl)

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1960 1963 1966 1969 1972 1975 1978 1981 1984 1987 1990 1993 1996 1999 2002 2005 2008 2011

Coal, Australian ($/mt) Coal, Colombian ($/mt) Coal, South Afican ($/mt) Figure 15: Percentage change in crude oil prices by decade.

Source: World Bank Commodity Price Data (Pink Sheet) 1960-2010.

Note: 1960 is the initial reference period for 1970 values, therefore showing starting point value.

The energy source affordability challenge is not limited to liquids alone. A look at the coal market reveals a similar global trend. Energy markets tend to co-influence prices. After a relatively long stable period in the coal market till the early 2000s, post-recession (2008) coal prices for Australian, Colombian and South African coal has also surged sharply (see Fig. 16).

Figure 16: Coal price trends.

Source: World Bank Commodity Price Data (Pink Sheet) 1960-2011.

A decade-by-decade look at coal prices demonstrates that the oil crisis of the 1970s has also lead to Australian coal prices increases in the decade to 1980 by over 400%. Coal prices stabilized and declined ever since until the 2000-2011 period, where prices for Australian, Colombian and South African coal surged by 361%, 206% and 338%, respectively (see Fig. 17).

The challenge for economies that may not rely on coal but on imported liquids is that prices seem to walk from one energy commodity market to the other, due largely to speculation.

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Figure 17: Percentage change in coal prices by decade.

Source: World Bank Commodity Price Data (Pink Sheet) 1970-2011.

Note: 1970 is the initial reference period for 1980 values, therefore showing starting point value. Data for Colombian coal prices available from 2001-2011; the value shown is comparison from 2001-2011. The data for South African coal is available from 1984-2011. Comparison for 1980-1990 period is based on data from 1984-1990 (growth rate of only 0.01%). Comparison for the last period is from 2000-2011.

The natural gas market has seen momentum in the last decade due to climate change and environmental concerns around the use of coal, its relative affordability and discovery of sizable natural gas resources globally. Speculation in the energy market in general and increased interest in natural gas use, including LNG, has led to a similar price surge. The natural gas price index, a composite index of gas price, shows significant surge since 2005 (see Fig. 18).

Figure 18: Natural gas price trends.

Source: World Bank Commodity Price Data (Pink Sheet) 1970-2011.

Analysis of the price trends decade-by-decade reveals that apart from the 1970-1980 price hike of over 830% (see Fig. 19), prices has actually went down in the 1980-1990 decade.

Prices surged again in the 1990-2000 decade, largely in US natural gas market, followed by a sharper increase in the 2000-2011 period, particularly in LNG market in Japan.

-100.00

1960 1963 1966 1969 1972 1975 1978 1981 1984 1987 1990 1993 1996 1999 2002 2005 2008 2011

Natural gas Index (2005=100)

Natural gas, US ($/mmbtu)

Natural gas, Europe ($/mmbtu)

Liquefied natural gas, Japan ($/mmbtu)

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Figure 19: Percentage change in natural gas prices by decade.

Source: World Bank Commodity Price Data (Pink Sheet) 1960-2011.

Note: 1960 is the initial reference period for 1970 values, therefore showing starting point value. Data for Japan liquefied natural gas is from 2011, therefore the 1970-1980 decade change is calculated based 1977-1980 data. Comparison for the last period is from 2000-2011.

The implication is clear – volatility and price surge in global energy markets pose serious energy security and economic stability challenge to countries, particularly in the developing world.