Energy Security Risks Factors: Transitions and Nexus with Policy Issues

IIESR covers 75 top energy consuming countries (as of 2010) of the world that represents around 80% of the global energy consumption over the period of 1980 to 2016. IIERS considers fou[r]

Energy Security Risks Factors:

Transitions and Nexus with Policy Issues

Zannatul Fardoush Kazi Arif Uz Zaman 1

Abstract

Energy security, over the years, is becoming a major apprehension for the policymakers in most

of the countries Limitation of the key resources and commodities in the increasingly demanded globalized energy market pose greater challenges, especially for the growing economies Comprehensive analyzing and quantifying of the dimensions of energy security risks and their nexus with other policy agendas like the economic growth and governance at the national, regional, and international level would be the key to formulate the strategies in this challenging scenario Using the International Index of Energy Security Risk (IIESR), this paper attempts to analyze the challenges of energy security risk across the largest 75 energy-consuming countries over 1980-2013 Transition paths show that after a sustained period with lower risk throughout 1990s and early 2000s, global energy security risk has been mounting up following the global financial crisis On average, high-income countries have been performing relatively well than others, while emerging middle-income countries are becoming highly exposed to these risks Convergence among countries are more noticeable for price and market volatility risk, energy intensity risk, and electricity sector risk while divergence is explicit in case of environmental risk Estimations depict that per capita GDP, political governance and regulatory quality have positive impact in reducing composite energy security risk

JEL classifications: Q40, Q43, Q48, D81

Keywords: Energy security, Energy security risk, Convergence of risk factors, Efficiency in

risk management, International Index of Energy Security Risk

1Corresponding Author at: Financial Stability Department, Bangladesh Bank Head Office, Motijheel, Dhaka-1000, Bangladesh, Email: arif.zaman@anu.edu.au

1 Introduction

Energy security, over the years, is becoming a major apprehension for the policymakers in most

of the countries A paradigm shift from the traditional development perspective towards the sustainable development perspective has added further significance to address the energy security issues The consumption pattern of energy is, therefore, also varying among the economies However, limitation of the key resources and commodities in the increasingly demanded globalized energy market pose greater challenges, especially for the growing economies (King and Gulledge, 2014) Since there is relatively smaller overlap between the top energy producing and the major energy consuming economies, most of the countries have

to depend on international trade to meet respective domestic demands Experiences reveal that such international trade is, however, susceptible to socio-economic commotions, and political intrusions Top of that, it is evident that key energy resources like oil and gas are geo-politically concerted within few regions or countries Several of these countries have been going through some sorts of socio-political turmoil in many occasions Since energy nowadays has turned into an essential global commodity, event in any place can affect the production, supply and price of elsewhere even for the most self-sufficient countries Hence, a deep insight and understanding on energy security and relevant probabilistic risks with degree of impact is so important In fact, comprehensive analyzing and quantifying of the dimensions of energy security risks and their nexus with other policy agendas like the economic growth and governance at the national, regional, and international level would be the key to formulate the strategies in this challenging scenario

Major concern about the energy issue is that it is so crucial but a scarce commodity Figure 1 depicts the ever-increasing demand for primary energy throughout the world Global energy consumption has increased by 50% during 1990-2008 Interestingly, the rate of growth in demand has become even greater since the global financial crisis Significant rise in demand in some big emerging economies like China, India and some non-OECD Asian countries are, indeed, influencing the global energy market with greater extent Forecast reveals that the rate

of increase in demand would be at least equal to the current rate, if not increase further till

2030

Figure 1: Trend of Global Primary Energy Consumption

Source: EIA (2017)

This sustained increase in energy demand would certainly be challenged by the uncertainty over future fossil fuel reserves, and growing reliance on a few geopolitically wobbly regions for the identified stocks of energy (WEC, 2013) Middle East, which is considered as the largest supplier of low-cost oil, has hardly been able to come out of socio-political uproars since the oil shocks in the 1970s Recent tension between Russia and Ukraine has re-exploded concerns regarding global gas security Though a significant exploration of unconventional oil and gas

in US and Canada in last few years appears to be a temporary solution to global reserves, but

it has been far criticized from environmental perspective While stock of coal is abundant with relatively secured supply, environmentalist have put a big question mark against it its future Prospects of large-scale use of nuclear energy is also debatable under the scenario in which public concern for safety measures as well as its geo-political implication seem to dominate (IMF, 2014)

Even though the price level of oil and gas remain lower and stable in last few years, there might

be a possible turn around in near future Top of that, energy subsidies in many countries have also lead towards economic losses and declining competitiveness In spite of such price incentives, there are still 1.3 billion people live without access to the modern energy services (IEA, 2014) Considering the overall scenarios, World Energy Outlook describes current global

energy system as ‘falling short of the hopes and expectations’ Therefore, it demands the

countries to take measures for strengthening their energy security framework with utmost priority Since each country or region has different sets of challenges in energy security, accurate indulgent and quantifying the dimensions of energy security from the national, regional and global perspective would be so crucial in tackling such challenges

2 Energy Security versus Energy Security Risks

Energy security is rather a complex issue to frame In reality, its boundary exceeds beyond the

conventional availability and affordability factors Policymakers are also compelled to count

the other aspects of this multifaceted issue like socio-economical, environmental, technical, and geopolitical Leaving one aspect would make the assessment incomplete and ineffective

At the same time, it is important to measure the probability of undesired scenario along with their probable impact on existing energy security Thus the concept of energy security risk evolves which seems to better capture the issues with wider dimensions and practicality (Labandeira & Manzano, 2012)

This paper is an attempt to address these issues with detailed empirical evidences and to accomplish the following objectives:

• To analyze the transition paths of the energy security risk related issues

• To determine the nexus between the energy security risk components and different policy outlooks such as economic growth, energy endowment and governance factors

Following research questions are set to answer:

▪ How the energy security risks have been evolving across countries over time;

▪ Whether the convergence in managing the energy security risks has been happening

or not among the countries; and

▪ How the different policy factors (growth, emission, and governance) have been interacting with the elements of energy security risk over time?

Rest of the paper is organized as follows: Section 3 provides few literature reviews, Section 4 describes the data and methodology, Section 5 analyses the results and findings while Section

6 ends up with policy measures and concluding remarks

3 Literature Review

In most of the earlier literatures, energy security is conceptualized as reliable energy supplies

at reasonable prices that would support the economy and business (Dorian et al., 2006) Hence, security of oil supply is synonymously used as the energy security (Fried & Trezise, 1993) This unidimensional supply-based perspective focuses mainly on reducing the probable threats and vulnerabilities originated from any ‘energy crises’ Many energy scarce countries in Asia and the West which are mostly import-dependent follow such principle in designing their energy security frame (Stringer, 2008)

Yergin (2006) however, states that this conventional concept of energy security is too narrow within the existing globalized energy market scenario Following the complexities arouse from energy transformations and uses among nations, he highlights on incorporating more dimensions with the orthodox energy security concept such as economics, climate change and environmental, international trade, etc Wu & Fesharaki (2007) emphasizes on enhanced cooperation and networking among the nations to tackle these risks in more comprehensive and sustained manner Consequently, there was a significant shift in the traditional energy security concept over the last decade (Victor & Yueh, 2010) Von Hippel et al (2009) argues for four major challenges to include into their new energy security concept that comprises environment, technology, demand-side management and Domestic Socio-cultural and Political Factors Vivoda (2010) extended the list with four more challenges such as human security, international, public relations, and policy

Literatures also encompass different methodologies to quantify the energy security and related risks Jansen et al (2004) focuses on supply risk measures along with the diversity of fuel by types and import sources Scheepers et al (2006) constructed the Supply-Demand Index to

measure the composition as well as the gap in country's demand and supply of energy APERC (2007) constructed energy security matrix with five indicators: net import dependency, net oil import dependency, variation of import diversity, diversity of primary energy forms and variation of fuel-type diversity Chester (2008) examines existing and proposed energy security policies of Australia by using four components such as availability, affordability, adequacy of capacity, and sustainability

Nicolas Lefèvre (2010) accounts resource concentration as an indicator for long-term energy security He also incorporates competitiveness and volatility based on fuel diversity to measure

price related risks Hughes and Shupe (2011) designs Decision matrices based four criteria of

a country's energy diversification and alternatives Von Hippel et al (2011) quantify energy security under varying scenarios by using six broader components During this time, several institutions applied more comprehensive methods to construct energy security index, especially for the developed countries (DECC, 2011; METI, 2010) However, all of these measures require proper data reporting system which may be difficult to get for some of the countries

4 Data & Methodology

4.1 Description of Data

Four categories of data are used from three different sources to organize the whole dataset for this paper

a) Energy Security Risk Index:

International Index of Energy Security Risk (IIESR), developed by the Institute for 21 st

Century Energy- a policy platform of the US Chamber of Commerce, is used for this paper

IIESR covers 75 top energy consuming countries (as of 2010) of the world that represents around 80% of the global energy consumption over the period of 1980 to 2016

IIERS considers four key areas of risk related to countries’ energy security: geopolitical, economic, reliability, and environmental This composite index is comprised of following

eight broader components derived from a total of 29 indicators (Appendix-A):

• Global fuels,

• Fuel imports,

• Energy expenditures,

• Price and market volatility,

• Energy use intensity,

• Electric power sector,

• Transportation sector, and

• Environmental metrics

Different units are used for different metrics i.e components To make the components meaningful as well as comparable, all the data are normalized by taking respective 1980 average OECD data as benchmark This normalization helps transforming all the metrics into a common unit which is vital to explain the trend as well as the relative measures of each metric across all the countries over the time period Therefore, IIERS seems to be a

‘first-of-its-kind’ measure that evaluates various dimensions of energy security risks across countries and country groups, and also allows to elucidate how these risks evolve over time Things to note that, IIESR is a risk index which is conceptually bit different from other conventional security indices IIESR conveys the notion of risk, i.e the probabilistic adverse impact on the indicators measured from existing scenarios is considered rather than the absolute value of the indicator In other words, value of a particular risk index of an indicator may be quite different from the notion of the physical outcome value of that indicator Therefore, a high value in risk index does not necessarily meant to match with a worse outcome value as compared to previous period Similarly, periods of lower risk do not necessarily meant to have better outcomes than earlier

Primary data sources for constructing this IIERS comprise the International Energy Statistics database of EIA, World Bank, IEA, and OECD To capture the risk factors associated with the energy supply and trade related metrics, the ‘freedom’ and the

‘diversity’ of global fuel supplies are counted Freedom House-a U.S based government

funded NGO sources composite indices for political rights and civil liberties in this regard

b) Income related data:

GDP per capita (constant 2005 US$) is used to determine the income level of the countries over the 1980-2016 period The data are collected from the World Development Indicators,

constructed by the World Bank

c) Emission related data:

Per capita CO2 emission, represents in metric ton, has been extracted from World Development Indicators over the 1980-2016 Emission stemming from the burning of fossil fuels and the manufacture of cement are considered

d) Governance indicators:

Government effectiveness, Political Stability and absence of Violence, and Control on corruption-these three measures from the World-wide Governance Indicators (WGI) are used to describe the governance scenario of the countries World Bank Development Research Group sources these data over 1995-2016

List of the countries covered in the dataset are indicated in Appendix-B

4.2 Methodology

For determining the nexus of IIESR and its components with growth, energy endowment and governance, fixed effect estimation method is used in this paper With the panel data, the fixed effect estimation will help to control the country-specific unobserved heterogeneities those remain fixed over time and also may have potential influences over the IIESR and its components

Here is the basic estimation equation used in this paper:

𝑌𝑖,𝑡 = Dependent variables with i-th country at time t

𝑋𝑘,𝑖𝑡 = Independent variable(s) k of i-th country at time t

𝐸𝑛 = Dummy variable for country n

𝑢𝑖,𝑡 = Error term

Three independent variable blocks i.e GDP per Capita, per capita CO2 emission and

Governance Indicators (comprises of Government effectiveness, Political Stability, and Control

on corruption) are tested Model also incorporates Control (dummy) variable to denote the

impact of Global Financial Crisis (GFC) by using Difference-in-difference approach

Logarithm values of all variables are used

5 Results & Findings

5.1 Transition patterns of the Energy Security Risk

Table 1 depicts the transition of IIESR for all the groups over 1980 to 2016 After the oil crisis

in late 70s, the energy risk mounted very high in 1980 However, there was some reasonably better period to contend energy-related risks throughout 1990s till 2000 Events such as 9/11 and subsequent global financial crisis seem to have profound impact on resurging the energy security risks in 2010 Risk levels, however, are going down since then

High-income countries, as expected, perform better than the others throughout 1980-2016 Middle-income countries experienced moderate level of risks while the low-income countries’

risk level surpassed the other groups as these low-income countries get easily exposed towards any regional or sub-regional crises in form of energy, political or financial turmoil

It reveals significant performance gap between the top-10 and bottom-10 countries The

deviation, which reached extremely high in the year 2000, has been declining since then There

is a sign of little convergence among the different groups’ risk management performances in last few years This convergence issue will be discussed in detailed in next section Performances of high-income countries was found the best in 2000 while it was in the year

1990 when the middle and low-income countries’ performances were at their respective picks

Table 1: Composite Risk Index

Source: Authors’ calculation based on Institute for 21 st Century Energy (2019)

Table 2 shows the list of top-10 countries which performed the best to manage the energy

security risk down over the years Mexico, Columbia, New Zealand, Norway and UK are consistently placed in the list throughout 1980-2016 Australia was in the list till 2000, but lost its place thereafter Energy abundant countries like USA and Canada also got into the list in recent times

Table 3 shows the list of Bottom-10 countries which performed the worst in dealing with the energy security risk over the years It is evident that Bottom-10 countries always comprise

resource scarce Singapore Besides, it often comprises few conflict-affected countries such as Syria, Libya and Iraq Interestingly, some of the Commonwealth of Independent States (CIS) namely Turkmenistan, Uzbekistan, Ukraine, and Belarus remain in this list since 2000 Establishing good governance, political reforms and stability, and resolving intraregional conflicts seem to be some of the challenging factors for these countries Risk level of Turkmenistan got worsen since 2000 which ranked the country as the worst in 2016

Table 2: List of Top-10 performing countries

5 Australia New Zealand New Zealand Denmark Mexico

7 Turkey Venezuela Australia New Zealand Romania

10 Saudi Arabia Indonesia Vietnam Switzerland Norway

Note: sl 1 remains the best performer

Source: Authors’ calculation based on Institute for 21 st Century Energy (2019)

Table 3: List of Bottom-10 performing countries

1 Bulgaria Syria Uzbekistan Uzbekistan Turkmenistan

Note: sl 1 remains the worst performer

Source: Authors’ calculation based on Institute for 21 st Century Energy (2019)

5.2 Composition of Risks

Composition of IIESR, as depicted in Figure 2 reveals that high-income countries are exposed

to higher portion of Fuel import risk as well as energy expenditure related risk as compared with other two groups Price and market volatility, along with Fuel import risk, are more dominant in low-income groups Shares of Energy intensity risk are getting smaller in all the

groups over the period Influences of electricity and transportation sector in total risk is found minimal for the low-income countries while the increasing share of environmental factors are more profound for all these groups in recent times

Figure 2: Transition in the Contribution of risk components

Source: Authors’ calculation based on Institute for 21 st Century Energy (2019)

Transition of risk components across different income groups is illustrated in Figure 3 From the movement of risk components, it is implied that at earlier the key concern for high-income

countries was the Fuel import related risks, which seem to be managed better later on, yet, rebounded since the global financial crisis in 2008-2009 Price and market volatility risk is a major concern for all the groups, which, however, has been reduced in recent time Energy

expenditure risk, which is largely impacted by the rebound effect, is found more prominent in

high-income countries than the lower Environmental risk, on the other hand, grows steadily

throughout the period of 1980-2016 for all the groups Most of the risk components other than

Price and market volatility risk seem to be well-contained by the middle-income countries Fuel import risk and Transportation sector risk are in growing trend for the low-income

countries while rest risk components are either in declining or constant trend

High-income Middle-income Low-income

Global Fuel Fuel Import Energy expenditure Price Volatility

Energy Intensity Electricity Sector Transportation Sector Environmental

Figure 3: Transition of Risk Components across income groups

Source: Authors’ calculation based on Institute for 21 st Century Energy (2019)

5.3 Efficiency in managing the risk

To measure the relative efficiency in managing energy security risks, top-10 countries’ average

scores are considered as benchmarks for each risk component Following that assumption, it is revealed from Table 4 that high-income countries are more efficient in managing the risks of

Price and market volatility, Energy intensity, Electricity, Transportation, and Environmental

sector Middle-income countries, on the other hand, are found to be more efficient with dealing

Fuel import risk, while the low-income countries are the most efficient group for managing Energy expenditure risk

1980 1990 2000 2010 2016

Middle-income

Global Fuel Fuel Import Energy expenditure Price Volatility Energy Intensity Electricity Sector Transportation Sector Environmental

0 100 200 300 400 500 600

1980 1990 2000 2010 2016

Low-income

Global Fuel Fuel Import Energy expenditure Price Volatility Energy Intensity Electricity Sector Transportation Sector Environmental

Table 4: Efficiency of Energy Security Risk management across income groups

Source: Authors’ calculation based on Institute for 21 st Century Energy (2019)

5.4 Convergence of Risk Factors

The convergence phenomenon is tested for all seven country-specific risk factors

a Risk on Fuel Import

Fuel import risk refers to the degree of dependency on imported fossil fuels It plays a critical

role for energy security issue Clearly, top-10 countries have managed this risk far well than the others as shown in Figure 4 Variation of this risk is quite high for the bottom-10 countries, while it remains very steady, on average, for the other groups However, there is a hint of

convergence among all since 2000 High-income countries are more exposed to this Fuel

import risk as compared to the other income groups Each income group has been successful

in reducing the risk related to fuel imports over the 1980-1990 period After that, trends seem

to be moderate till 2010 and got upward since then for all three groups

Figure 4: Convergence of Fuel Import Risk across countries

Source: Authors’ calculation based on Institute for 21 st Century Energy (2019)

b Risk on Energy Expenditure

No trend of convergence is found between the top-10 and bottom-10 countries in case of Energy

expenditure risks as depicted in Figure 5 Rather, the gap has been increasing since 1990

However, for the three income groups, there is a little indication of convergence until 2010 which marked some diversion since then

Figure-5: Convergence of Energy Expenditure Risk across countries

Source: Authors’ calculation based on Institute for 21 st Century Energy (2019)

Fuel Import Risk

Top 10 Average Bottom 10

0 50 100 150 200 250 300 350

Fuel Import Risk

High income Mid-income Low-income

Energy Expenditure Risk

Top 10 Average Bottom 10

0 50 100 150 200 250

Energy Expenditure Risk

High income Mid-income Low-income