The Handbook of Global Energy Policy

Andreas Goldthau, Andreas Goldthau

• Publisher: Wiley-Blackwell
• Year: 2013
• ISBN:
  9781118326350
• Edition: 1
• Topic: Politics & International Relations
• Subtopic: Public Policy
• Index: Politics & International Relations

This is the first handbook to provide a global policy perspective on energy, bringing together a diverse range of international energy issues in one volume.

• Maps the emerging field of global energy policy both for scholars and practitioners; the focus is on global issues, but it also explores the regional impact of international energy policies
• Accounts for the multi-faceted nature of global energy policy challenges and broadens discussions of these beyond the prevalent debates about oil supply
• Analyzes global energy policy challenges across the dimensions of markets, development, sustainability, and security, and identifies key global policy challenges for the future
• Comprises newly-commissioned research by an international team of scholars and energy policy practitioners

Part I

Global Energy: Mapping the Policy Field

1 The Role of Markets and Investment in Global Energy
Albert Bressand

2 The Entanglement of Energy, Grand Strategy, and International Security
Meghan L. O’Sullivan

3 Sustainability, Climate Change, and Transition in Global Energy
Michael Bradshaw

4 The Development Nexus of Global Energy
Gilles Carbonnier and Fritz Brugger

Chapter 1

The Role of Markets and Investment in Global Energy

Albert Bressand

Introduction: A Political Economic Perspective on Energy Markets

The term “energy markets” is misleadingly simple. True, in a world of 7 billion people, energy is one of the fundamental factors of production, comparable in importance to labor, capital, technology, and commodities in the satisfaction of human needs. Yet, at first look, the energy industry differs from the rest of the economy in four essential ways. The first of these is its capital intensity, the second the endogenous nature of many energy transportation infrastructures and the elements of natural monopoly they often exhibit. The third differentiating feature is the importance of rent and of conflict over rent distribution. Resulting in part from these first three specificities, but also rooted in security concerns, the fourth distinctive feature is the eminent role of the state in the ownership, control, and development of energy resources, with major implications regarding the role of policy, regulation, and geopolitics. In many countries, the role of the state extends to setting prices and conditions for the consumption of, notably, petroleum products and renewable electricity. Let us consider briefly these features before we put forward a political economic framework adapted to the study of energy markets and investment.

The World’s Most Capital Intensive Industry

Energy is the world’s most capital intensive sector, with major implications for relations over energy resources. A half-century perspective often governs energy investment and it is not infrequent to have to gather in excess of $10 billion for a given project, with major undertakings absorbing over $100 billion as is the case for the development of the Kashagan oilfield in the Kazakh part of the Caspian Sea or of the redesign of national electricity grids in Europe to adapt to intermittent and decentralized power sources. Turning enough in-place deposits (coal, oil, gas, uranium…) and natural forces (wind, sun, hydro…) into actual energy resources and bringing them to consumers in various markets can be an amazingly expensive proposition. According to the International Energy Agency (IEA), and subject to the policy assumptions in its New Policies scenario, cumulative investment in energy supply infrastructures will amount to no less than $38 trillion (year 2010 basis) over the 2011–2035 period, the equivalent every year of a tenth of the US GDP, or of the whole GDP of Spain. Of this investment, about $17 trillion will happen in the power sector and $24 trillion in total in non-OECD countries. The term infrastructure as used by the IEA is closer to fixed capital, as it encompasses upstream investments for the replacement and exploitation of reserves ($8.7 trillion for oil, $6.8 trillion for gas, $1.1 trillion for coal mining (IEA 2011a: 96–97)) as well as transport and distribution infrastructures in the more usual usage of the term.

A Largely Industry Specific and Industry Produced Energy Transport Infrastructure

Whereas labor, capital, technology, and even raw materials are easily mobile using general purpose infrastructures, many forms of energy can only reach their market through the construction of dedicated and costly pipelines, power grids or distribution networks that often exhibit natural monopoly features and are also typically subject to stronger forms of political control than is the case for most other industries. Although oil and coal can be carried in trains and trucks, the provision of the infrastructure needed to transport and distribute almost all of natural gas and electricity, most of crude oil, and a part of petroleum products is endogenous to the sector, provided as part of a three-tier value chain of upstream, midstream, and downstream.

No other industry features such a clearly identified midstream, which introduces an additional layer of connection between energy resources and territory, and therefore political control. This gives transit states nuisance power that may be exercised in the non-economic manner, well illustrated in Russia–Ukraine relations among others. The oil and gas midstream abounds indeed in “pipeline wars.” While landlocked producer countries have little alternative, others can opt for seaborne transport of energy, for which investment is limited to vessels and port infrastructure, with fewer claims on territory and more limited options to exercise territorial control. In the case of natural gas, however, and leaving aside the still limited use of compressed natural gas, seaborne trade is not the magic bullet for depoliticization it is often made to sound; liquefaction is a prerequisite and comes at a high cost of $4–20 billion dollars depending on specific site circumstances, which makes it uneconomic compared to pipelines over short and medium distances and which also calls for complex licensing in light of national interest considerations, as can be seen in the US presently. Nevertheless, seaborne transportation gives producers access to a diversity of markets, thereby reducing the potential for counterparty opportunism so frequent in the case of dedicated, land-based infrastructures.

In the case of electricity, seaborne transportation is not an option and grids exhibit features similar to oil and gas pipelines. The difference however is that, currently, international trade in electricity is limited to a few regions and is often of a more symmetrical nature (as any country can produce electricity, unlike oil and gas), reflecting differences in daily and seasonal patterns of consumption and production. This may change however, as can be seen from massive projects to carry “green electrons” across the Mediterranean and as large-scale interconnections are needed to offset some at least of the unpredictability of intermittent solar and wind energy. One should be prepared for the possibility that midstream issues will become as important, and potentially as politicized, in electricity as they are in oil and gas.

Rents and Subsidies

A third distinctive feature of energy markets and investment is the importance of economic rent. Indeed, as the point is restated by Bassam Fattouh and Coby van der Linde, “sizable economic rents have been a prize deemed worth fighting for, far beyond the normal competition among market players. They have guaranteed persistent involvement by governments everywhere, either as producers or tax collectors” (Fattouh and van der Linde 2011). Rents exist in all markets but, under normal competition, they tend to reflect comparative and competitive advantages that can be reduced or eliminated through innovation, economies of scale, marketing, and other techniques endogenous to productive activities. Rent is far more pervasive, lasting, and protected in energy markets than in most other markets.

Deliberately limiting a company’s or a whole country’s production below the production that could meet demand at a given price, as happens in oil and gas, is fairly uncommon in most markets, especially if competition rules are in place to proscribe abuse of market power.

In oil markets, production by the low-cost OPEC producers is subject to production quotas. Even if they tend to be only loosely respected, such quotas make higher-cost production indispensable, placing high-cost producers in the position of marginal suppliers to the market. OPEC members meanwhile denounce the petroleum taxes levied notably by European countries as unfair tools to snatch rent away from them. The high rent embedded in oil and to some extend natural gas prices reinforces calls for subsidized energy. To the public in the Arabian Peninsula countries, paying oil at a price close to extraction cost rather than reflecting rent captured in the international market sounds natural even if the national oil companies are keenly aware of what this means in terms of foregone export revenues. Several hundred million final hydrocarbon customers benefit from subsidies that the OECD estimates to have grown from $340 billion 10 years ago to about $409 billion now for countries for which numbers exist, and probably half a trillion dollars in total. Such subsidies very significantly change the outcome of market interactions toward higher usage of energy resources. A good case in point is Saudi Arabia, which registered an absolute increase of its domestic consumption of oil of 1.2 mbd (million barrels per day) over the 2000–2010 decade, second only to China’s (4.7 mbd) and higher than India (1.05 mbd), although the kingdom’s population is below 30 million while it is well above one billion in India and China. The same European customers who pay high taxes to consume petroleum products often benefit from subsidies for coal-generated electricity. Altogether, producer rent and consumer subsidies play an essential role in shaping substitution effects across energy markets and in investment patterns, leading to patterns of resource allocation that differ profoundly from what would result from free market forces.

Resource Nationalism and Enlightened Resource Mix Tinkering: Omnipresent States

While supported and reinforced by all three features just reviewed, the fourth distinctive feature of energy investment and markets, namely omnipresent states, has strong roots of its own, notably in national security. The present rise of state power over energy decisions tends to be described under the heading of “resources nationalism,” a cliché which assumes that some producer countries (notably OPEC members and Russia) treat energy as a political or geopolitical resource and constitute the major source of interference in energy markets (Gustafson 2012). Yet, as illustrated by the gamut of subsidies, taxes, renewable energy portfolios, feed-in tariffs, and other policy mandates, consumer states are also essential players in the energy arena. As observed by the IEA in its latest WEO report, “Renewable energy subsidies jumped to $88 billion in 2011, 24% higher than in 2010, and need to rise to almost $240 billion in 2035 to achieve the trends projected in the New Policies Scenario” (IEA 2012).

States take a direct interest in the consumption of energy as a condition to maintain support either from green-minded constituencies or from purse-constrained consumers, with the former weighting more in Europe and Japan and the latter more important in the US, Asia, and the Middle East. Europe as well as 28 States in the US and the District of Columbia conduct policies aiming to shift energy consumption away from what would result from the free operation of markets, by requiring a significant proportion of biofuels in transportation fuels and/or of renewable electricity in power brought to the market. While they often do it with the objective to “correct market imperfections” and notably to avoid a “market lock-in” of higher carbon energy sources, it remains true that resource allocations reflect a combination of market forces and policy mandates. This is true also of nuclear energy, as some countries set limits on it (France in 2012 decided to do so in ways still to be articulated) or ban it altogether (Italy, Germany).

With resource nationalism a poor guide, a typology of energy policy environments should be organized in terms of the combination of sovereign objectives and market objectives that exist in all countries (Bressand 2009). In the US, market objectives play an essential role, but nevertheless “energy independence” objectives and, increasingly, environmental policy mandates also have a profound impact. CAFE standards have proven powerful to reign in transportation fuels consumption. At the other extreme countries like Mexico and Saudi Arabia perceive energy as essential to their independence and national security. In between, countries like the Russian Federation attempt to strike a balance between sovereign objectives and market dynamics, with the development of national energy champions a major objective. The existence of international sanctions (most notably currently on Iran’s oil exports and on investment in its gas resources) create another category, as do policies to reach energy independence through the facilitation of international investment in countries like Colombia. Altogether, six different groups of countries can be identified on matters of hydrocarbon policies and of investment and market conditions (Bressand 2009).

As a result, investment in energy and the working of energy markets differ significantly from what standard economic models would predict based on usual patterns of relatively free competition. Implications from the four specific features just reviewed include massive subsidies, enduring fragmentation of global gas markets, the fact that oil resources are being developed in deep water at costs 10–15 times higher than lower-cost resources still abundantly available in the Middle East, as well as the fact that some countries eagerly invest in large-scale power generation from non-competitive renewable technologies as an effort to create, over time, the set of market signals supporting the type of energy mix that their energy policies will have put in place.

A Northian Perspective on Resources, Institutions, Transactions, and Power

Altogether, energy is a domain in which some of the world’s most liquid global markets and most capital intensive investments coexist with and are influenced by political, cultural, institutional, and g...

Table of contents

• Cover Page
• Handbooks of Global Policy Series
• Title Page
• Copyright
• Figures and Tables
• Notes on Contributors
• Introduction: Key Dimensions of Global Energy Policy
• Part I: Global Energy: Mapping the Policy Field
• Part II: Global Energy and Markets
• Part III: Global Energy and Security
• Part IV: Global Energy and Development
• Part V: Global Energy and Sustainability
• Part VI: Regional Perspectives on Global Energy
• Index