ENERGY SECURITY: Governments Again in Control of the Energy Business

Energy security cannot find a complete and adequate response in market mechanisms. Any form of public intervention, although different from the intrusive forms of the past, must be in a collaborative relationship between governments and private enterprises.

Written by: Prof. Dr. Alfredo Višković

While the new Croatian energy strategy currently under public discussion aims to achieve energy security, the European Commission announced on November 13 an ambitious plan that includes a series of proposals to enhance the energy security of the European Union. What does energy security mean for Croatia and who is dealing with it?

It is an essential part of national security and international relations, as modern society cannot operate without adequate energy supply. It is not a static concept but mutates depending on changes in market conditions, international politics, and the behavior of economic powers. Once, attention was primarily focused on oil, while today it encompasses a generality of sources.

The main consequence of the intensification of issues related to energy security is that for the majority of governments worldwide, energy has once again become primarily a political issue. Only by understanding the new directions of action that have developed in most public Western policies can the positions taken by many countries to defend their industries be understood.
The European Court ruled on June 4, 2002, that energy security implies a ‘public legal interest’ that allows governments to maintain ‘certain influence over companies that were public and then privatized when they operate in sectors of general or strategic interest,’ provided that the measures used rely on specific criteria that are known in advance and subject to legal control.

For many Western European governments, large national companies have thus become (due to the lack of other tools and the absence of a unified European policy) the main, if not the only, means of countering the purchasing power of large corporations (especially non-European producers) to limit their market growth and secure gas supply through long-term contracts. In a situation of uncertainty in international gas supply, the takeover of a national company by a foreign competitor would pose an objective risk of ‘redirecting’ gas supply to the country of its origin, regardless of the level of relative prices.

The increase in political influence on the strategies of national and European examples is also visible in exporting countries. The merger in 2006, worth $28 billion, of Norwegian companies Statoil and Norsk Hydro (71% of the first is state-controlled, and the second has a 44% state stake), owners of almost half of the remaining oil and gas reserves in all of Europe, was motivated by the government, preserving their national and public nature (62% of the new company is retained by the state). The same can be said for the governments of producer countries, whose involvement in the operations of national oil companies is increasingly strong and primarily conditioned by political motivations.

Things in the world of energy are not as many cases of companies changing ownership might suggest. ‘Creating national energy champions,’ wrote the Financial Times, ‘is not necessarily wrong, as long as the underlying logic is industrial rather than mere economic patriotism.’

Another matter is whether they are capable of opposing the community of criticality on which the issue of energy security relies. Nevertheless, it remains a fact that the policies of European countries are oriented towards strengthening their large companies, favoring consolidation processes through strategies of vertical, inter-sectoral, and international integration. Unfortunately, given how things truly stand, the possibility that the actions of many smaller companies in energy markets can increase demand, strengthen competition, favor price reduction, and enhance security is quite far from reality.

The reality, however, is completely the opposite. The size of companies, their internationalization, rather than their number, makes the difference in the ability to invest vast capital; in the ability to conclude contracts for imports lasting 25-30 years, differentiating their origins and risks. Ultimately, in resisting the new names of ‘energy security.’ Traditionally, ‘energy security’ has been understood as the ability to ‘have energy available at any moment, in any form, in sufficient quantities, at sustainable prices.’ The discontinuity compared to the past is the complete globalization of the world oil market, which has introduced strong changes in its structural organization (from almost monopolistic to competitive) and in its mechanisms of operation. Financial logic indicates that companies do not want to accept risk and turn to short-term profit, thus replacing the long-term strategies that public regulation, which was much stricter, forced upon them. It is entirely understandable that the market and modern regulation can effectively take care of this.

Viewed from the perspective of energy security, the main stance changes towards the unavailability of companies to make investments that would recreate the conditions for increasing production capacity before necessary to restore the flexibility of international exchanges and reduce the danger of political tensions. Such investments would mean additional costs for demotivated companies within a narrow entrepreneurial logic, with the additional risk of favoring price reductions.

Energy security, of course, has its price. If it is not paid, even greater consequences are suffered. Viewed from an economic perspective, equated with national defense, it is a public good from which the entire collective benefits, but unable for economic agents to determine the price and make it available in sufficient quantities. Hence the need for corrective state intervention: with obligations on the burden of companies and relative costs included in the price paid by consumers or on the taxes of the entire community. The issue of energy security becomes a government priority, simultaneously becoming much more complex to face, for two reasons: the transition to different energy sources and its multiple dimensionality.

Thus, first, if the risks mainly related to oil supply from politically unstable areas and against the West, today they are even more strongly related to gas supply (the energy source to which Western systems are increasingly turning) because it is monitored by few countries, led by Russia and Iran, which together hold more than 40% of the world’s reserves. The misconception that gas is not the same as oil and that its suppliers, viewed from a security perspective, differ from the Middle East, has disappeared with the impartial use that Russia has exploited as a weapon of political pressure.

The multiple dimensionality of security implies three risks: political, economic, and physical. Political risks arise on one hand due to the increase in vulnerability situations throughout the oil and gas value chain, and on the other due to the use of these situations by exporting countries as a means of international political pressure.

Economic risks arise from the vulnerability of economies to shocks caused by prices, with a negative reflection on growth, due to today’s poorly adaptable monetary policies. The profitability of the nuclear option was not, for example, only in guaranteeing independence or in cheaper production (although those who have appropriated it today benefit greatly from it), but primarily in the fact that such an option allowed for the creation of endogenous, stable, and predictable energy costs/prices, contrary to what has happened with oil and gas.

Finally, there are risks related to the physical reliability of energy supplies within individual markets. It is significant, almost paradoxical, that the most serious and costly disruptions in recent years have stemmed from events within, rather than outside, the end markets, which the Western world feared. The list is brutal: electrical blackouts in many countries, emergencies related to gas production, failures in transmission infrastructures (electricity, gas, and oil transport), as occurred on the main oil pipeline in Alaska in 2006. To consider such events as pure fatalism is an alibi whose role is to hide the real causes: on one side, a lack of investment, and on the other, the positive economic integration of markets, which has, however, made them mutually dependent and individually more vulnerable. In the absence of adequate infrastructural reinforcements, network systems highlight extreme sensitivity to any unpredictable event.
In conclusion, we can state that energy security is increasingly presented as a political issue that cannot find a complete and adequate response in market mechanisms. Any form of public intervention, although different from the intrusive forms of the past, must be in a collaborative relationship between governments and private enterprises.