Richard Jones, Deputy Executive Director, International Energy Agency
Good morning, everyone. It is an honour for me to join your plenary session, and I want to thank the IISS for inviting me to be with you today. Today’s topic, comprehensive energy security, is something that the IEA contemplates on a daily basis. As I am sure many of you know, energy security was the main reason for creating the IEA during the time of the 1973‑74 oil crisis. The IEA’s initial focus was on oil security and, in particular, emergency preparedness for supply disruptions, such as those that occurred during the first Gulf War and following Hurricanes Rita and Katrina.
This continues to be a central feature of the IEA’s mandate. However, our understanding of energy security has evolved over the past 35 years. The gas supply disruptions of the last few years in Europe are well known but not unique. Similar disruptions, albeit on a smaller scale, have occurred in recent years in Latin America and Asia. Such events underscore the growing importance of gas security.
There are issues in electricity security as well. For example, continuing to ensure reliable electricity supplies and stable prices while increasing the share of variable energy sources, such as renewables, remains an unsolved challenge. In addition, we have had to confront a challenge closely linked to energy security – that of sustainability. Sustainability comes in many forms, including of course sustainability of the physical supply, but also economic and environmental sustainability, including the threat of climate change, as James Smith pointed out.
With this in mind, let me make some brief remarks on global energy trends, before turning to the policies and mechanisms that can improve the security as well as the sustainability of our global energy system. With the financial and economic crisis, global energy use in late 2008 and 2009 actually fell on a significant scale for the first time since 1981.
Nonetheless, on current policies, it will quickly resume its long‑term upward trend as world growth resumes. This is just simple arithmetic; it is largely driven by demographics. I believe our outlook is very similar to the one that James mentioned, that Shell has.
Our reference - our ‘business as usual’ scenario - in the World Energy Outlook, our main publication of 2009, projects how global energy demand will likely evolve if governments make no changes to their current policies. It estimates that world energy use will rise by about 1.5% per annum, on average, between now and 2030, year after year. Furthermore, fossil fuels will be utilised to satisfy three‑quarters of this primary energy demand. This means that if we continue on today’s energy path, we are looking at rapidly increasing dependence on fossil fuel imports, increasing vulnerability to volatile energy prices, and a continued rapid rise in energy‑related emissions of carbon dioxide.
In short, this energy future is not sustainable, from either an economic, a security or an environmental standpoint. But the IEA does more than just warn about problems; we also do our best to devise solutions for them. Accordingly, the World Energy Outlook also set out what we called a 450 Scenario, which shows how adopting appropriate policies internationally can limit a temperature rise to 2 degrees Celsius by the end of this century.
The 450 Scenario highlights how policies to promote energy efficiency are essential, particularly in the short to medium term, so we agree completely with Shell’s point of view on that. However, policies to accelerate the spread of low‑carbon energy technologies are also needed to achieve the scenario. Again, you have been told how wind and solar power need to multiply.
In short, the 450 Scenario provides a policy blueprint for a revolution in the way we produce, transport and consume energy. Although it was designed to help ensure environmental stability, the 450 Scenario shows that following this blueprint will also have significant benefits for energy security and economic sustainability. If they adopt the policies the 450 Scenario advocates, energy-consuming countries should see reduced import dependency, decreased diversification of energy sources, less volatile prices and lower energy bills.
Policies to mitigate the risk of climate change and energy security turn out to be intrinsically linked with one another. I note that, even in the 450 Scenario, as Mr Smith pointed out, fossil fuels will still play an important role in the world energy mix. Our estimate is that they would comprise 68% of global primary energy demand in 2030. So, again, very similar.
The EU’s net oil imports in 2030, in the 450 Scenario, will still be over eight million barrels a day, while its natural gas imports will amount to 428 billion cubic metres per year. That is an increase of more than 100 billion cubic metres over today’s levels. This is why the IEA continues to advocate investment in fossil fuels generally, and the integration of new sources of supply into the European gas mix, in particular.
I would now like to turn to some of the other political policies and measures that can improve our security, both in the short and longer term. First, we can make a considerable and cost‑effective impact by curbing growth and demand through energy efficiency. This is the least‑cost approach with huge potential, particular in the shorter term. For example, we feel that about two‑thirds of the reductions in emissions can come out simply by using energy more effectively.
Second, we need greater diversity of supply. By this I mean greater diversity in terms of the types of energy relied upon - a more balanced mix of energy sources, if you will - and the routes and means by which they are transmitted and distributed. On top of this, the flexibility of distribution networks should be enhanced. Measures to enable reversibility of flows and to eliminate bottlenecks, for example by increasing capacities at interconnections, are essential.
Third, the examples of the Iberian and the Nordic regions show us that coordinating regional electricity grids, as well as integrating gas markets, will also enhance energy security; as will speaking with one voice to the suppliers of energy. An integrated regional market, with clear and transparent rules, is not only more resilient, but has the regional scope and scale to attract new, larger investments and external supplies.
Fourth, energy investment has to pick up quickly after the current recession so that we avoid a renewed tightness in supply and a peak in prices as economies recover. We are quite concerned that rising prices could snuff out a recovery before it really gets going. Policies and price signals need to be right to encourage such investment, including for a sustainable energy mix.
These are the essential steps that we see towards greater energy security in the long term. At the same time, we must also be prepared to take short‑term emergency response measures when hit with a crisis that goes beyond what energy markets are able to handle on their own. The IEA has well-developed systems for responding rapidly at the outbreak of an oil disruption. This includes measures to increase available oil supplies, primarily through the use of strategic oil stocks. It’s a requirement of IEA membership that all countries hold at least 90 days of import stocks. In fact, IEA countries currently hold stocks equal to about 135 days of their net imports. This is a mixture of private stocks; company stocks, which can be counted if the government has legislation which allows it to control them; but also public or governmental stocks, which today would last about 64 days.
Drawing on only these public stocks - which are of about 1.5 billion barrels - and without a change in consumption patterns, IEA members could weather a supply disruption of two million barrels per day, such as occurred after Hurricanes Katrina and Rita in 2005, for up to 24 months. Even a distribution equivalent to the larger supply impact of Iraq’s invasion of Kuwait could be compensated for a full year. However, an ever‑greater share of world oil is being consumed outside of IEA countries. It is therefore essential that other countries join our pursuit of oil supply security. Otherwise, the risk that IEA efforts will be swamped by uncoordinated responses of other market players will become too great. To prevent this, we have put considerable effort already into promoting cooperation with major net importers, such as China and India. Both countries are now working hard to develop their own emergency capabilities, including oil stockpiles. We have invited them and other non‑member countries to take part in our emergency response exercises and they are doing so.
What about gas security? Our analysis shows that, as with oil and other commodities, the best line of defence against a gas supply disruption is a well‑functioning, economically efficient market. However, the need for additional emergency response measures beyond well‑functioning markets for gas was demonstrated all too clearly by the 2006 and 2009 gas supply disruptions in Europe. Unfortunately, not all of the emergency measures for oil are readily transferable to the gas sector in all countries. Stocks can be used to compensate for gas disruptions, as Hungary showed in 2009, but they are much more expensive than in the case of oil, and not all countries have the right geologic formations for safe, long‑term storage of commercially viable volumes or commercially significant volumes. Therefore we must explore other options, such as maintaining an ability to switch to oil or other energy sources in important sectors such as power. Drawing on strategic oil reserves in times of a gas crisis, as well as carefully crafted demand side policies, are also possibilities. Of course, finally, Liquefied Natural Gas (LNG) is a good supplement for pipeline gas.
In conclusion, we face formidable challenges in the coming years to meet our energy needs in a secure and sustainable way. Our energy use will grow and our import dependency will increase along with it, at least for most countries. I agree completely with what Mr Smith said: that none of us can ever really achieve energy independence. Even countries with abundant or ample indigenous sources of energy are not fully independent of world markets. Their exports may well be affected and they will probably experience rising prices in times of a crisis. Independence is a mirage, in our opinion.
Rather, the aim of energy security policy should be the reduction of risks associated with high dependency on a limited number of fuels, suppliers or import routes. The more fuels, suppliers and import routes you have, the better off you are. This works the same way for producers of energy: the more consumers they have, the more routes and so on, the better their security.
In a world of evolving needs and technologies, overall energy security should be carefully defined and continuously monitored. We should also recognise that security needs will vary on a country-by-country basis. In fact, even though the IEA has been in the business for 35 years, work in these areas is just beginning. However, it is already abundantly clear that we must work together regionally and globally to develop resilience in our energy markets and infrastructures. As well as greater flexibility and diversity of energy sources and routes, greater international cooperation is essential.
Finally, we must also not forget the risk of supply disruptions and work together to respond to emergencies. We cannot enhance our energy security by risking someone else’s. Thank you very much for your attention.
