CAMBRIDGE, Mass., May 17, 2006 – The world’s energy producers, consumers and policymakers must urgently consider how the traditional oil-and-OPEC-based energy security approach of the 1970s can evolve to meet new realities and long-term needs, the World Economic Forum and Cambridge Energy Research Associates (CERA) write in The New Energy Security Paradigm. The report will be used as an agenda-setting outline for meetings of the World Economic Forum’s Energy Industry Partnership in coming months.
CEOs Consensus
A survey conducted by World Economic Forum of global energy company CEOs showed that top executives consider energy security to be the highest ranking issue facing the global industry, demanding action and posing a high level of uncertainty in both the short and long-term. Climate change and long-term energy supply concerns were also among the top-rated issues.
New forms of terrorism was ranked as the concern posing the highest level of uncertainty, and a $100/barrel oil price was cited as having the highest potential impact. The New Energy Security Paradigm addresses the concerns raised by CEOs and analyzes the meaning of energy security in the global economy of the 21st century.
Energy--the Hinge of the World Economy
“Energy is the hinge of the world economy and its security cannot be taken for granted,” the report argues, laying out four critical sets of questions for the institutions, companies and decision-makers whose actions will shape the energy future:
- Supply signals – Will new national policies or international agreements resolve the current lack of government policy clarity on issues ranging from climate changes to contract stability that introduce supply-limiting risk into new energy investment?
- Demand signals – Will price signals suffice, or are there other possible signals that can help reduce or moderate energy demand, and are signals from governments required?
- Integration challenges – How can societies take advantage of the efficiencies produced by energy system integration without undue exposure to the risks of supply chain breaks or potentially crippling supply losses from natural disasters or terrorist attacks?
- Institutional and market structure changes – Are new institutions needed to foster energy security? Will governments shift away from relying on markets to a centrally planned approach? How can countries like China, India and Russia be integrated into the global energy system? What opportunities can be created for cooperation between consumers and producers?
Framework for Solutions
In the report, CERA Chairman Daniel Yergin argues that “the risks are different, the considerations for the best response have changed, and the implications for solutions are far more complex. The 1970s model is no longer sufficient and a more expanded concept now seems necessary.” The report then cites ten key principles of energy security that should be considered:
- Diversification of energy supply sources is the starting point for energy security.
- There is only one oil market.
- A “security margin” consisting of spare capacity, emergency stocks and redundancy in critical infrastructure is important.
- Relying on flexible markets and avoiding the temptation to micromanage them can minimize long-term damage.
- Understand the importance of mutual interdependence among companies and governments at all levels.
- Foster relationships between suppliers and consumers in recognition of mutual interdependence.
- Create a proactive security framework that involves both producers and consumers.
- Provide good quality information to the public before, during and after a problem occurs.
- Invest regularly in technological change within the industry.
- Commit to research, development and innovation for longer-term energy transitions.
Evolving Paradigm
The energy security paradigm is evolving into a new form, according to the report, based on a far more complex integration of economies, energy infrastructure, and political alliances. The old energy security structures continue to operate effectively, as illustrated by the successful response to energy supply disruptions caused by Hurricanes Katrina and Rita. However, the next crisis no doubt will have different causes and will require fresh solutions.
The report tracked changes in the original elements of energy security:
- Global oil supply and demand – Oil production capacity is becoming concentrated in 15 countries, nine of them OPEC members, which will control 58% of world liquid production capacity by 2015. National oil companies have joined in the competition for resources and will require new infrastructure to bring product to market. Oil demand is rising quickly in China, Brazil, East Asia and South Asia so that OECD countries, which accounted for 70% of demand in 1974, today represent just 60% of global demand. Almost half of global oil demand growth over the next 10 years will occur in the Asia Pacific.
- Dash to natural gas – Demand for natural gas, the fuel of choice for new power generation, has more than doubled in the past 30 years, driven largely by new technology, with the largest volume growth in the Asia-Pacific, the Former Soviet Union, Europe and the Middle East. Liquefied natural gas (LNG), with more supply flexibility than point-to-point pipelines, will claim 17% of the global market by 2020, up from 7% in 2003.
- Power demand growth – With economic growth and development driving global power demand, markets are shifting between state ownership and deregulated, commercially based structures. However, a swing back toward greater state control for power markets, as well as some oil and gas operations, is possible if markets are perceived to be insufficiently reliable. Local communities are more vocal about the impact of new development, affecting the timely construction of new infrastructure.
The New Energy Security Paradigm further explores new energy security elements which have joined traditional concerns on the global agenda, including interconnections of world economies, climate change and technological innovation, and a broader array of stakeholders and pressures. The full report is available for download at www.weforum.org/energy .
About the Energy Industry Partnership
The New Energy Security Paradigm is the first semi-annual Energy Vision Update for members of the World Economic Forum’s Energy Industry Partnership. It is intended that energy suppliers, energy producers, policy-makers and consumers can use this framework to join together to shape a new energy security paradigm that addresses the realities of the 21st Century and respond to all stakeholder needs in a cooperative fashion.
World Economic Forum Energy Security Agenda Steering Board
Abdallah S. Jum’ah, President and Chief Executive Officer, Saudi Aramco, Saudi Arabia
Helge Lund, President and Chief Executive Officer, Statoil, Norway
Claude Mandil, Executive Director, International Energy Agency, France
About the World Economic Forum
The World Economic Forum is an independent international organization committed to improving the state of the world by engaging leaders in partnerships to shape global, regional and industry agendas. Incorporated as a foundation in 1971, and based in Geneva, Switzerland, the World Economic Forum is impartial and not-for-profit; it is tied to no political, partisan or national interests. (www.weforum.org).
About CERA
Cambridge Energy Research Associates (CERA), an IHS company, is a leading advisor to energy companies, consumers, financial institutions, technology providers, and governments. CERA (www.cera.com) delivers strategic knowledge and independent analysis on energy markets, geopolitics, industry trends, and strategy. CERA is based in Cambridge, Massachusetts, and has offices in Bangkok; Beijing; Calgary; Dubai; Johannesburg; Mexico City; Moscow; Mumbai; Oslo; Paris; Rio de Janeiro; San Francisco; Tokyo; and Washington, DC.
© 2006, Cambridge Energy Research Associates, Inc. All rights reserved. CERA and the CERA logo are registered trademarks of Cambridge Energy Research Associates, Inc.
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