The situation in the global energy sector is characterized by a combination of two complex and controversial trends: on the one hand, there is increased competition in the global energy market due to an apparent rise in the supply of conventional resources (hydrocarbons), and on the other, that competition in the most important markets is being increasingly politicized and regulated. The global energy situation is beginning to impose a major constraint on the global economic and social development; this industry is also becoming a global sandbox where, along with the global financial sector, promising regulatory models are being live-tested. Energy development is becoming a segment of the global economy that determines the most important medium-term trends of global development. The effort the US is making to secure dominance in the global energy market is also indicative.
The current system-wide trends in the global energy sector are determined by a combination of several factors. First, there has been a certain slowdown in economic growth amid administrative attempts to launch a new wave of energy-saving technologies that do not have an indisputable or economically unconditional underlying basis. This has led to a significant slowdown in the growth of energy consumption around the world; however, a shrinking demand for energy resources does not yet seem to be a possibility either. This creates an unstable price situation in the energy market and opens up wide opportunities for price manipulations, mainly of a short-term nature. These manipulations are not necessarily initiated by the largest players; most importantly, they can be the result of accidental combinations of circumstances. Nevertheless, we can definitely record a general long-term trend of the growing cost of energy resources.
Secondly, the energy shortage and the relatively high cost of energy in a number of industrialized countries are becoming major constraints for social development and sustainable economic growth. They are becoming critical and need to be dealt with in order to lend a new impetus to globalization and to establish more balanced relations between the post-industrial “metropole” and industrial “semi-periphery.” The change in these relations is initiating a transformation of the mechanisms for the redistribution and reinvestment of energy rents on a global scale, which will create future risks for the “metropole”, primarily for the global financial sector.
Thirdly, the active introduction of non-economic regulation methods in energy – at the level of world trade in resources and in national regulatory mechanisms in a number of countries and economic macro-regions – reduces the scope of classical market mechanisms and leads to the accumulation of asymmetries in the development of regional energy markets.
Fourthly, an important factor in the development of this situation is concentration of processes around traditional or new but economically tested vectors of energy development. Despite the express demand for the industry’s development, there are no breakthrough technologies which were indicated at the investment level and which could provide an actual breakthrough in the energy efficiency. This factor will remain an element of mid-term uncertainty and a point of support for significant manipulations in the industry. Non-transparency of technological investing is an element that reinforces these opportunities.
The problem is that the current wave of competition is hardly making any contribution to increasing the energy efficiency and developing energy competitiveness. On the contrary, it is resulting in attempts to toughen the administrative and political regulation in a big part of the energy market.
This leads to a conceptual deadlock. To decrease the economy’s energy consumption, projects are started and funded which will, if successful, secure energy expenses at a substantially higher level (at least in the mid-term perspective) because they will require a higher level of cost-effectiveness to compensate for earlier investment. In addition to this contradiction, there is another. On the one hand, the dynamic development of the global energy market requires increasing the investment flow into both traditional areas of global energy (specifically, oil production and refinery) and prospective areas such as development of new energy platforms. On the other hand, increasing the investment flow into energy could only happen through redistribution of the ‘energy rent’ that plays an important role in ensuring relative stability of the global financial sector as its reduction may have severe consequences.
It has to be stated that in the midterm, the manageability of the global energy market will be declining. Moreover, at a certain stage an issue will be inevitably raised as to whether it is at all possible to maintain the integrity and format unity of the global energy market. In the midterm, our fate is instability in the energy industry and short-term fluctuations related to the gap between the investment and operational components of the global energy.
The U.S. policy of the recent years indicates that the highest possible de-institutionalization of the global energy market, dismantling of the existing regulatory institutions and temporary chaotization are becoming a priority. This could be achieved, among other, by using political and military means as it has been happening with the attempts to exclude Iran from the global hydrocarbon trade. What will happen next is new institutionalization based on all major actors (both producers and consumers) acknowledging the United States’ monopoly to performing regulatory functions in the market. Afterwards, a new institutionalization is possible when the status of the United States as a global but now formal regulator of the energy market will finally become permanent.
In the mid-term, a relatively long period of chaotization in the global energy market is inevitable. Yet, it is unobvious that the United States will be able to fully retain control over this process. This will inevitably create a number of considerable operational and investment consequences for Russia, which will apparently be assessed correctly by the Russian government. The manner of the current economic process objectively dictates a necessity of seeking new spotlights for investment process and centers for ‘crystallization’ of regionalized economic growth. The new stage of the energy’s development, which includes new energy projects and energy sources outside traditional systems, may well become a basis for developing new economic growth centers, not solely in the context of the operational point of view but also in the context of establishing new investment mainstream in technology.
We are facing a comprehensive and consistent need for the transformation of the energy sector on a global basis. There are the following reasons behind the new energy starting to play a systemically important element for the new economy:
- The emerging necessity of a new energy resource settlement system which would be more secure for exporting countries.
- The existing actual economically and socially induced demand for new energy technologies, including those related to an increasing energy competitiveness of the real sector of economy.
- The fairly clear investment mechanism for implementation of projects in the energy sector, both in the traditional technology format and in a new one, as well as its further introduction and monetization of its results through existing investment mechanisms. Many energy resource exporters are interested in changing the mechanisms for the rent’s turnover and investment.
- The availability of pilot geographical markets for selling and primary approbation of new energy technologies and engineering solutions (Africa and South Asia) that are important for both technologic and substational renovation of the energy sector.
In this regard, the main factor is a need for simplified logistic chains and fewer number of intermediaries, which is concerned with both goals of concentration of the received ‘rent’ and the reduced non-economic risks.
- Increasing politicization of the energy market’s traditional segments, which is altering suppliers’ competition principles and is forcing them to seek market segments with a lesser non-economic component. This manifests to the maximum extent in the natural gas market, but the process affects all energy resources, including coal, to various extents.
The negative aspects that aggravate making the ‘new energy’ a driver for global economic growth include:
- The ambiguity of the technology mainstream, which is overspecified by the concept of energy conservation and alternative energy sources, and reduces the amount of attention and investment opportunities of technologically advanced countries aimed to develop new technology platforms.
- The possibility of manipulating the information space around the subject and the principal possibility of making global fake projects. This is one of the most important risks for the foreseeable future.
- The need for significant funding at the initial stage of the project and the impossibility of the development of such projects in the startup format.
- The expressed need in the regionalization of economic growth, a limited globalization of new investment and operations formats in energy; the need to introduce new formats in economic growth regionalization.
It is important that the creation of a new energy platform and the overall improvement of energy efficiency in the current configuration of investment and financing component of global energy sector will at least partly facilitate the prolonged existence of the current version of global economy by suppressing the trend towards its reorganization.
Energy revenue will be further transformed into virtualized investment resources. What is important is to what extent the key players on the global energy market would want to transform the system.
Russia is in a more complex situation than it seems: on one hand, there is a growing rivalry on foreign markets, at least for the medium-term period. A lack of energy in the global or regional context seems unlikely, especially with regard to the predicted slowdown of China’s economic growth and the introduction of energy saving technologies to the country’s economy.
The competitiveness on the global energy market in its existing state will almost inevitably become aggravated, and Russia will be less competitive given the active and focused sanction policy of the West. In this context, the expenses to maintain its status as an energy superpower might be inadequate to the potential result, and most importantly, will require the use of political and even military instruments to maintain Russia’s leadership in global energy. This status is important for Russia to maintaining its influence on global economic processes, as opposed to global political and military processes, where it has a more diversified presence format. In the medium term, it will be necessary to reconfigure the national energy policy in accordance with the new global environment, first of all, its investment part, and to convert to the medium-term planning in investment and technology development. This will result in a strengthening role of the state in the development of the energy sector.
By Dmitry Evstafiev, Professor at the Communications, Media, and Design Department at the Higher School of Economics