Geographic shifts in oil and gas markets are changing the fundamentals of energy security. Global energy security has evolved within a three-legged structure now rocked by new patterns of supply and consumption and by changing international relations.
The first leg of this framework is the International Energy Agency, established in 1974 by the Organization for Economic Cooperation and Development in response to the Arab oil embargo. IEA's core program is storage of crude oil that can be shared among the 28 members during supply emergencies. Around that function have developed an extensive system of statistical reporting and market analysis and efforts to harmonize member-nation energy policies, support technological development, and combat climate change.
Producer-consumer dialogue
A newer leg of the global energy-security apparatus is the International Energy Forum. The 88-member IEF grew out of a quest that began after the Persian Gulf War of 1991 for cooperation among oil producers and consumers. The IEF now holds biennial ministerial-level forums preceded by events that encourage bilateral negotiations. Like IEA, the IEF also has an information function. In 2005, the IEF Secretariat became coordinator of the Joint Organizations Data Initiative (JODI), which aims to moderate oil-price volatility with improved transparency of oil markets. JODI's information program depends on reporting by member countries of basic oil data.
The third leg of international energy security is the undeclared agreement under which the US ensures the military defense of Saudi Arabia and oil-trade routes in exchange for Saudi efforts to moderate crude oil prices, especially during supply disruptions. In support of its role in this opaque arrangement, Saudi Arabia maintains spare production capacity of at least 1.5 million b/d.
Founding assumptions of the IEA became obsolete long ago. The organization's primary concern in 1974 was a politically motivated withholding of supply such as the one under way at the time. Changes since then, including the development of strategic oil hoards, make such disruptions unlikely. The oil market is much more flexible and transparent than it was in the 1970s. And oil states, especially those on the Persian Gulf, have economies and revenue needs much more advanced than they were then. They need to sell oil as strongly as importers need to buy it. Likely supply disruptions now relate to natural events and political upsets of individual exporters.
More recently, patterns of oil demand have changed. Consumption is declining in the OECD, the realm served by IEA's security mechanism, and zooming elsewhere. IEA expects non-OECD to exceed OECD demand for the first time in 2014, largely because of increases in China and India. Even more recently, oil supply has begun to grow rapidly in the Western Hemisphere thanks to world-class offshore discoveries in Brazil and onshore development of unconventional resources in the US and Canada. Meanwhile, growing trade in natural gas adds a dimension to global energy security. Concern that once focused on oil movements from the Middle East to big markets in Europe and the US now must encompass the concentrating trade of oil between the Middle East and Asia and account for gas as well.
The international security establishment is adapting. IEA is cooperating in several ways with non-OECD countries and has included representatives from China, India, Thailand, and Indonesia on committees and boards. Under IEF auspices, IEA representatives are meeting with counterparts from OPEC on subjects such as market outlooks. Participation of IEA and OPEC can help IEF develop JODI into the comprehensive oil-market reporting mechanism it envisions.
Role of collaboration
Most important in these changes is expansion of the role of collaboration. A reciprocal development is deemphasis of the confrontation, especially between OPEC and the economically developed world, that once dominated deliberations about international energy security.
All these developments challenge traditional assumptions and eventually will elicit political questions within Saudi Arabia and the US about the affordability of and need for sustaining the tacit security partnership. Clear now is that producer-consumer dialogue has become an essential element of global energy security.
