Energy Security

Disruption to fuel supplies and shortfalls can occur from natural disasters such as the 2011 earthquake and tsunami in Japan. Due to the high degree of uncertainty in predicting natural disasters, the energy market needs to have reserves to meet changing marketing conditions. As of June 2011 the 28 IEA members collectively reported that they had 4.1 billion barrels of oil reserves and less than 1.6 billion barriers of public stocks held exclusively for emergency purposes. Currently members have around 146 days of net oil import stocks, less than minimum of 90 days required to be an IEA member. The IEA was established in 1974 in response to the oil crisis in 1973. When members of the Organisation of Arab Petroleum Exporting Countries (OAPEC) stopped selling oil to the United States and the Netherlands due to their support for Israel in the Arab-Israeli War, included in this embargoed list was South Africa, Rhodesia (now Zimbabwe) and Portugal.

On top of this is the degree of uncertainty in projecting demand from emerging economies such as China and India. In 2010 China overtook the US to become the largest consumer of energy. Growth in oil demand from China and India has grown by 9.0% and 4.7% respectively annually in terms of arithmetic growth between 2000 and 2010 compared to a global average of 1.4%. Demand for fossil fuels in China is continuing to outstrip domestic supply resulting in the country looking outside of China for supply, particularly West Africa. This has resulted in China potentially being in direct competition with the US for oil supplies, especially as West Africa is closely to the US that the Middle East cutting down transportation costs. Furthermore, Chinese oil companies can offer soft loans, lines of credit and development aid for oil supplies. For example, China made a USD 20 billion loans-for-oil agreement with Venezuela in April 2010. Chinese companies have also been buying overseas assets, particularly in African countries, to improve the country’s energy security to a more stable state. Something which some developed countries may be reluctant to do, especially in the current climate with austerity measures and high government debt.

The rise of China, and to a lesser extent India, has undoubtedly affected energy markets, like the Arab oil embargo in 1974, fall of the Iranian Shah in 1980 and collapse of the Soviet Union in 1991. Furthermore, both China and India have a goal of maintaining a 90 day stockpile of oil. In 2010 Chinese oil and gas companies continued to acquire development companies such as the China Petrochemical Corporation’ acquisition of a 40% stake in Repsol and 100% stake in Occidental Argentina Exploration & Production, and CNOOC’s 50% stake in Bridas Energy Holdings; along with new interests in the shale gas sector.