Mightier Than the Sword: Energy Markets and Global Security

Article excerpt

Dennis O'Brien is Executive Director of the Pacific Economic Cooperation Council and President of the International Association for Energy Economics.

The twentieth century has seen the concept of energy security evolve from a framework of military threats and diplomatic responses to one of economic threats and market solutions. As the century draws to a close, energy markets have grown very complex and efficient, with control over those markets widely dispersed among energy consumers, manufacturers, and suppliers. The oil market, for example, has become significantly more efficient since the 1970s: information technologies and market transparency allow refinery managers to select their input blend from a wide variety of crude oils to balance demand for a complex array of products, a demand further complicated by disparate environmental and quality requirements across markets. The intricacy of the system defies traditional government intervention and regulation in times of market stress. Yet the oil market is as critically important as it is complex: the internal combustion engine will remain the major source of transportation power for at least two more decades, and oil will remain its most significant fuel source.

The markets for electric power and for the fuels that generate that power have also changed dramatically and are now a major energy security concern. Both developed and developing economies need a stable supply of energy and cannot tolerate the slightest interruption or shortfall. The explosion of economic growth in developing economies--particularly in Asia--has created an explosion in demand for electricity, an energy product critical to growth and modernization. Electricity itself has evolved from a highly regulated industry in which producers each depend on a single source of energy into a more loosely regulated industry in which producers use more competitive mixed fuels and heat sources for thermal electricity generation. The ownership of electric power facilities and of source fuels is converging into private sector companies which transcend national frontiers and comprise "mixed marriages" of energy industries which rival the traditional major energy companies. Similar patterns of deregulation, privatization, and segmentation are occurring in developed and developing economies at lightning speed, resembling trends in the telecommunications market. Furthermore, electricity generation is quite vulnerable to terrorist attack and natural disasters, and its interruption can threaten entire economies. Many developing economies are concerned that the volatility of the fuel supply and inappropriate investment in electric plants could threaten their future energy security.

Traditional concern over secure supplies of oil for transportation and electricity generation may be too narrow to serve as a definition for energy security in the twenty-first century. In the future, the critical issue for both the public and private sectors will be market security. To define market security and to propose solutions for the future, an examination of past perceptions of threats to, and policies for, energy security is required.

To Victory on a Sea of Oil

The first threat to energy security in modern times came during World War I and primarily concerned fuels for military use. The British Navy converted from using coal as its major source of energy to bunker oil in 1913 under the leadership of Winston Churchill, and other major fleets soon followed suit. In addition, the new machines of war required gasoline and diesel--both new products--to operate. This meant that crude oil and petroleum products had to be transported through hostile waters infested with enemy vessels to reach the ports of Europe. Oil became an important part of the diplomacy and strategy of both the Entente nations and the Central Powers. Revolutionary Mexico was regarded as the most important new supply area in the world and Germany's initiatives in the form of the infamous Zimmerman telegram to the Huerta government--inviting Mexican support in the war--posed a major threat to the oil supply of the Entente nations. …