There are some big changes on the horizon for the energy sector. Image: REUTERS/Robert Pratta
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Energy security – the uninterrupted access to affordable energy – is transforming fast. In the past, geopolitics and the supply of oil and gas were the dominant factors determining energy security. Today, a broader and more complex spectrum of elements are interacting to both stabilize and threaten energy security.
It is therefore timely to take a fresh look at the forces driving this transformation over the next decade – and some of their effects. Many of them are different to anything we have seen in the past.
More energy resources in more countries
The availability of energy sources, when we consider both fossil fuels and renewables, is increasing. Today, there are more sources of energy in more countries. Take the example of oil and gas, which is now available in abundance in the US, or the growing availability of renewables in countries that can draw on large supplies of water, wind and sun.
In particular, a major source of change is the strong growth in renewable and distributed energy, which offers avenues to diversify the energy mix and thus improve energy security by reducing physical reliance and price exposure to only a few sources and countries.
Renewable energy is also cheaper than in the past, and this has the potential to significantly improve energy access in off-grid areas and allow some countries to bypass traditional energy sources. However, when changes like this happen on a large scale, they have bigger repercussions on the whole energy system, which will need to be managed. It is not unrealistic that changes to access and quality of energy supply will affect political stability in countries affected by frequent power cuts.
Geo-economic implications of falling prices
Oil and gas prices have been tumbling.
Source: London School of Economics
This has strong implications on petroleum-producing countries and companies, with knock-on effects on geo-economic balance of powers and energy markets. But what makes this different from the past is the fact that the price shock is not only caused by geopolitical trouble or demand-supply balance. It is a fundamental struggle for long-term market share and the resilience of the industry. The lifting of sanctions on Iran, increased production in Russia and Saudi Arabia, and the US fracking revolution are all elements of this dynamic.
While we hear a lot about declining demand in China, it is interesting to note that in 2015, oil demand increased. At the same time, investment in the industry has decreased: oil and gas companies are already estimated to have deferred $400 billion in investments, with more expected, as most people don’t see prices recovering to levels observed during the commodities super-cycle any time soon. As investments in the industry fall but demand increases, the risk over the medium term is actually that there will be a spike in oil prices.
The digital revolution
The convergence of physical and digital infrastructure, and the new insights we can draw from data that is now available, offers opportunities to improve efficiency, lower costs and increase security.
But it also raises a whole new set of challenges and creates vulnerabilities we have never seen before. As a result, many people are now calling for energy to be viewed as a key part of national security. This means that critical energy infrastructure that we use to extract, store and transport energy must be made more resilient to both physical and digital attacks. In 2016, we already need to start planning for the likelihood that conflicts of the future will most likely include cyber dimensions, with critical infrastructure becoming a “weapon” of choice.
For those resource-rich countries that rely heavily on energy exports, the reduction in revenue is creating significant challenges and some opportunities. While fossil fuel subsidies can be reduced or eliminated – which is good news – falling revenue from oil and gas sales is significantly reducing investments in the wider economy, which has an impact on both the social system and the sustainability of the economy itself. Already we have seen countries such as Azerbaijan and Nigeria look for help from international institutions like the World Bank. We may see this trend continue, and the risk of failed states is now a very real one.
Looking at the entire value chain
While in the past the supply side was the dominant factor in energy security, with the critical element being the possibility of sourcing the products to produce electricity and provide mobility, now the energy security equation is shifting. Supply is as important and as vulnerable as is the transmission and distribution of energy. The threats of terrorism – both physical and cyber – are present across the whole energy value chain. There is also the more positive issue of demand management – a concept that has significantly changed in the past 20 years, thanks to the digital connectivity that can help reduce peak demand and balance the grid when there are shifts in demand or supply.
When considering all these new elements affecting energy security, it is evident that risks can’t be tackled by any one country, institution or sector. Sharing data, addressing structural vulnerabilities and building in-depth collaboration between different public and private stakeholders will help create more secure energy systems.
Most importantly though, each and every person needs to understand the complexity of the energy system – what we call “energy literacy” – so that everyone can help develop and protect it, just as we do with other indispensable parts of our lives, such as computers and credit cards.
The most important thing for us to remember about energy security over the next 10 years is that it’s not about “them”: it’s about “us”.
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The views expressed in this article are those of the author alone and not the World Economic Forum.
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