Global Governance and World Energy Markets NS4053 Week 5.2
Security implications of world energy market • World energy markets periodically generate perception of insecurity for stakeholders. • What type of insecurity? For whom? • Historically, reaction by key stakeholders to unpredictability has been to try to establish governance mechanisms. • Which stakeholders and who gets to make the rules?
Evolution of Energy Markets Governance • Ongoing struggle among stakeholders for the upper hand. • Result is an international market that is (mis)shaped by efforts by stakeholders in both producing and consuming states to protect themselves. • Patchwork quilt of international governance institutions try to address the cross-border effects.
Who sets prices? Obsolescing Bargains Market Prices? Rise of the NOCs in 2000s OPEC setsprices 50/50 Seven sisters set prices
“Seven Sisters” • Threat is that in a high fixed-cost/low variable cost industry, any drop below the cost of production is ruinous. • Perpetual issue with supply vastly exceeding demand. • How to ensure prices remain above marginal costs of production? Control costs and raise prices. • Market concentration ratio by 7 firms enables tacit collusion. • In their self-interest to hold down production and raise prices. The real issue is coordination.
“Seven Sisters” solution • Control costs through vertical integration and advantageous deals with oil producing states. • Coordinate to restrict supplies to drive up prices. • Control of major pipelines. • Interlocked boards with largest world financial institutions. • Shared pricing formulas. • Negotiated entry of new suppliers. • In the seven sisters self-interest to coordinate to restrict supply. • System eventually slips under pressure from new entrants, rising demand, obsolescing bargains and collapses during oil shocks.
The OPEC alternative • Example of difficulty of establishing supranational governance mechanisms. • No central enforcement mechanism: • No Texas Railroad Commission • Very easy to cheat • Difficult to coordinate (consensus voting) • Interests of members frequently at odds • Market position • Politics
Understanding lack of impact of OPEC • Quotas have little significant impact on production • Depletion rate (reduced production) is significant but problematic finding in a larger context. • Significant variables under Colgan model 2-4: • Market position (oil rich vs. oil poor) • War • Corruption • Not significant • OPEC membership • Sanctions • Regime type • Quotas
OPEC 1973 impact • Raising posted prices to market prices. • Encouraging nationalization of oil industries. • Uncertainty for investors. • OPEC countries now control production rates. • Claim to embargo certain countries • Not empirically effective • Psychological impact.
Persistence of beliefs about OPEC “They [OPEC] want to go in and raise the price of oil because we have nobody in Washington that sits back and says you’re not going to raise that f—-ing price, you understand me?” — Donald Trump, April 2011 “You’ve got Donald Trump saying don’t pay OPEC $100 for the oil. Just tell them you’ll give them $50. Really? I go into Trump’s hotel, it’s $1,000 for a suite and I say I’m not going to give you that, I’ll give you $200. I’m on the street looking for another place to sleep. You can’t tell them I’ll give you $50 when the world market is $100. It just doesn’t work that way.” – T. Boone Pickens , Feb. 2012
Why still focus on OPEC? • Slow learning • Information asymmetries. • Complex market only understood by a few insiders • Politically useful fiction for both OPEC and non-OPEC states.
Market pricing • High prices in 1970s produce reactions by other stakeholders. • Collapse of world energy demand breaks OPEC efforts to control prices. • Market pricing predominates after 1986. • Increased privatization of energy industries through 1990s. • This mechanism still prevails, although higher prices have revitalized national oil companies and created new fears about market politicization.
Governance issues going forward • Securing a reliable international market for energy. • Preserve ability to enter into and enforce contracts across borders. • Preserve security of energy production and distribution channels. • Increase market information availability to reduce fear (and fear mongering). • Reduce manipulation of markets by governments and other stakehodlers in producing and consuming countries. • Deal with cross-border consequences of externalities. • Enable sharing of innovation (for efficiency and development) while protecting intellectual property.
Problems • Classic problems: free riders, public goods, commons, externalities. • Globalization has added complexity. • Many more stakeholders demanding a say in eventual solutions. • Mismatch between global nature of problem and national locus of sovereignty. • Poorly organized institutional framework to address issues.
Possible answers • Inter-governmental institutions • Summitry • Coordinate action by government leaders • International financial institutions • International public-private partnerships
Cases • International Energy Agency: • facilitation, transparency, expertise, agenda setting, but not a lot of power. • G8 Summits: • theoretically, meet the deciders. • In practice, decide to delay and dissemble. • Regional development banks: • Money talks. • Good governance and technical assistance. • Have to make a return to continue to exist. • REEEP hybrid • Voluntary • Invest in expertise. Focus on pilot programs that can diffuse.
Security implications • Access and reliability • A major problem is disinformation, market psychology, rumors. • Better information leads to better markets. • Protect a reliable international contracting mechanism. • Tied back to issue of market politicization. • Discourage market manipulation by governments. • Efficiency • Technical expertise, information sharing, best practices. • Sustainability • Future access through coordinated action? How? • Still have not answered the question of who pays.