Energy security: Perceptions versus realities
Global energy markets have proven resilient to crises that would have once caused lasting disruptions. But turmoil could return if policymakers draw the wrong conclusions.
In a nutshell
- Energy markets have become much more durable since 1973
- The growth of LNG has been a boon to energy security
- Policymakers risk overlooking the importance of diversity of supply
Not long ago, any instability in the Middle East would send oil prices soaring and the global economy into a tailspin. Today, with a war raging in Gaza, Houthi missiles sinking ships in the Red Sea, and Iran and Israel trading direct attacks on each other, the oil markets are barely taking notice. That comes on top of the ongoing war in Ukraine, heavy sanctions imposed on major oil producers – from Russia to Iran and Venezuela – and the Organization of the Petroleum Exporting Countries Plus (OPEC+) production cuts totaling about 5.9 million barrels per day, or nearly 6 percent of global supply.
In gas markets, Europe witnessed its most severe energy crisis in 2022, when its decades-long relationship with Russia – then its largest supplier – was severed following the expansion of the war in Ukraine. European gas prices jumped by almost 700 percent that year, hitting a record high of more than 330 euros per megawatt hour in August. However, prices quickly declined thereafter and eventually plunged to a tenth of their 2022 peak, even though the European Union-Russia standoff has not been resolved.
The above trends do not demote the impact of geopolitics on energy markets. However, they illustrate an important development: The world has become more resilient to energy supply disruptions and to threats to those supplies. Had the above crises happened 10 or 15 years ago, their impact would have been much more severe and long-lasting.
Even so, many continue to argue that the world’s dependence on fossil fuels endangers energy security and that domestically produced green energy would promote it. One recent publication by the International Monetary Fund (IMF) argues that “the ongoing energy crisis amid Russia’s invasion of Ukraine has exposed the longstanding vulnerabilities from fossil-fuel reliance and rekindled national energy security concerns.” Referring to the first oil shock in 1973, European Commission President Ursula von der Leyen stated that “the world did not learn the lesson. We did not get rid of our dependency on fossil fuels and mainly oil.”
In fact, the world has learned many lessons since that shock. Energy supplies have become much more secure than in the 1970s. The main risk today comes from overlooking the sole and fundamental requirement of energy security: diversity.
Oil markets, then and now
2023 marked the 50th anniversary of the world’s first shock. On October 19, 1973, Arab oil producers stopped their oil exports to a group of countries allied with the United States, which supported Israel during the Yom Kippur War with Egypt. Combined with a series of production cuts, the embargo caused oil prices to nearly quadruple within a few months. Prices remained high even when the embargo was lifted, causing major economic pain. Global energy and financial crises ensued.
However, these crises triggered a fundamental shift in global oil markets, both on the demand and supply sides, which gradually reduced the probability such a scenario would recur and consequently improved the security of energy supplies.
In 1973, oil accounted for nearly half of the world’s primary energy consumption. But the spike in oil prices caused a structural destruction of demand. After that year, oil’s share in the global primary energy mix started to decline, as it was partially displaced by other fuels in various sectors (including residential and district heating, electric power generation and industry). The exception to this trend was transport, where substitution has been limited. Today, while oil remains the dominant fuel, its share in global consumption is about 30 percent.
Oil intensity – the volume of oil consumed per unit of gross domestic product (GDP) – has meanwhile registered a 56 percent decline (through 2019), illustrating not only an increasingly efficient use of the fuel but also its decreasing significance to society. “Oil has become a lot less important and humanity has become more efficient in making use of it,” concluded a 2021 study from Columbia University’s Center on Global Energy Policy.
Another crucial outcome of the 1973 oil shock was the creation of the International Energy Agency (IEA). One of the agency’s core responsibilities is “ensuring the security of oil supplies by setting stockholding requirements for member countries,” whereby each IEA country holds total oil stocks equivalent to at least 90 days of their net oil imports. In case of a severe oil supply disruption, IEA members can release these stocks to the market as part of a collective response to dampen the impact on prices and protect local economies.
Changes have also occurred on the supply side. In 1973, OPEC produced half of the world’s oil, which gave it substantial influence over the market. Today, that share has dwindled to approximately 36 percent. Meanwhile, production from outside the producer group has increased. In the years following the embargo, high prices encouraged the rapid development of oil and gas output in the North Sea and Alaska. Decades later, the shale oil and gas boom turned the U.S. into a net energy exporter, altering conventional competition dynamics. This change in status also modified the U.S. approach to emergency oil stocks – known as the Strategic Petroleum Reserve (SPR), which is the world’s largest stockpile of emergency crude oil. For instance, many interpreted the decision of President Joe Biden to release about 55 million barrels of oil from the SPR in 2021 – in a period of undisrupted supply – as a way to push OPEC to increase output and ease inflationary pressures.
Natural gas
The first oil shock also had ramifications on natural gas, which became the closest substitute for oil in power generation and petrochemicals. Back then, the share of natural gas in electricity generation was around 12 percent. By 2022, that share had nearly doubled to 23 percent.
The increasing popularity of natural gas spurred a growing gas trade, which had initially been largely limited to pipelines, through a gradual expansion of liquefied natural gas (LNG). By 2020, LNG had overtaken pipelines as the main vehicle for interregional gas trade, connecting hitherto isolated markets and offering both suppliers and customers greater flexibility and optionality.
The growth of the global LNG trade has had important implications for energy security, since it gives countries access to a diverse range of gas supplies and helps reduce dependence on a single source, as is typically the case with pipeline trade. Europe has had first-hand experience with such benefits. Only a few months after Russia invaded Ukraine, the high gas prices that prevailed in Europe attracted a significant volume of LNG cargoes. By October 2022, LNG tankers were queuing at European terminals – an unimaginable scenario only a few years ago.
Energy security perceptions
Those developments convey remarkable progress on the energy security front. Still, the prevailing perception is quite the opposite. A review of the literature on the topic reveals that there is no single, universally accepted definition of energy security. From consumers’ perspective, the reliability of energy supplies remains the underlying key feature. However, the exact interpretation of that notion varies across organizations and countries. Quantifying it is fraught with complexity.
The IEA defines energy security as “not just about having uninterrupted access to energy, but also about securing energy supplies at an affordable price.” Such a definition incorporates price volatility, which is a concern to many and is often interpreted as a threat to energy security. However, in any functioning market, volatility should be expected. What matters more is the system’s ability to swiftly respond to that volatility. Developments in oil and gas markets over the last two years, in particular, illustrate that agility – something green energy has yet to demonstrate.
Notable variations in the definition of energy security can be identified across countries and regions. According to the European Commission, energy security will be achieved by replacing imported fossil fuels with domestically produced renewables and improved energy efficiency. The British parliament lists “the availability of fuel, affordability, environmental and geopolitical acceptability, and accessibility of energy.” Meanwhile, the U.S. refers not only to “having enough energy to meet demand” but also to “having a power system and infrastructure that are protected against physical and cyber threats.”
The U.S. – like many other countries – also puts special emphasis on energy independence, which is secured through domestic production. However, Japan’s experience illustrates the risk of such an approach. When the Fukushima disaster happened, it was the country’s imports of LNG that kept the lights on.
As Mirjana Radovanovic argues, there is still no generally accepted methodology for evaluating energy security, with the plethora of definitions and different approaches to measurement making the topic “a suitable field for abuse and manipulation. This is because indicators cover different aspects of energy security … and the results are not only different but can often be contradictory.”
Facts & figures
- To date, there have been five collective releases of emergency oil stocks by IEA members: during the buildup to the Gulf War in 1991; after Hurricanes Katrina and Rita damaged oil facilities in the Gulf of Mexico in 2005; in 2011, after the outbreak of the Libyan Civil War; and two releases in March and April 2022, shortly after Russia’s full-scale invasion of Ukraine (source: IEA).
- In the U.S., the SPR is kept in underground salt caverns in Texas and Louisiana with a capacity of 700 million barrels. Up to 4.4 million barrels can be withdrawn per day (equivalent to nearly a quarter of U.S. daily consumption).
- Between 2012 and 2022, interregional sales of LNG grew more than four times faster than pipeline trade.
- In 2022, fossil fuels accounted for 82 percent of the world’s primary energy mix, compared to 93 percent in 1973.
- The Asia-Pacific region is the world’s largest consumer of oil, accounting for 36 percent of global demand in 2022, compared to 15 percent in 1970.
- The top three producing countries in oil and gas represent 43 and 46 percent of global oil and gas supply, respectively. In contrast, in the case of lithium, cobalt and rare earth elements, the world’s top three producing nations control more than three-quarters of global output.
Energy transition
IMF research has found that the green transition is expected to have a net positive effect on energy security. However, the study highlights one key condition: “provided investments are aligned to address new challenges posed by the increased reliance on renewables.” It also made an ambitious assumption that all countries will introduce carbon prices – a measure which, under existing trends, the world is still a long way from adopting.
The energy transition is mining-intensive. Solar panels, wind turbines, battery storage, electric vehicles and electricity cables, green technologies and infrastructure – all rely heavily on different sets of minerals and metals. Most of those minerals and metals are concentrated in a few developing countries whose institutional frameworks are not well-established, thereby creating a real risk for investment.
Besides, when a natural resource assumes greater strategic importance and increases in value, it attracts state intervention and control – which can take the form of higher taxes, the creation of state-owned enterprises with equity participation in various projects, export controls and even nationalization. This onset of what has been called “resource nationalism” can slow or even stop more flexible private investment in the sector, potentially causing serious shortages – both intentional and unintentional.
Scenarios
No matter how energy security is perceived, its basic ingredient has always been security of supply, which can be achieved through diversity and diversity alone. As the IMF concludes, “the diversification of energy trade partners, or the lack thereof, is the main factor that underpinned energy security dynamics over the last two decades.” One could add “and for many decades to come.”
If countries do not follow this simple principle, they will make themselves more vulnerable to potential supply disruptions, surging energy prices and serious economic, political and social challenges. The energy transition will suffer in tandem. But if a more balanced approach to the energy transition is adopted and a diversified portfolio is pursued for both energy sources and suppliers, energy security will continue to improve, even if it can never be fully guaranteed.
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