The Global Energy Market: Comprehensive Strategies to Meet Geopolitical and Financial Risks

Publications Page

The joint Energy Forum and IEEJ major study on The Global Energy Market: Comprehensive Strategies to Meet Geopolitical and Financial RisksThe G8, Energy Security, and Global Climate Issues is a one-year study, finalized prior to the G8 meeting scheduled to take place in Japan during July 2008. The research examines a variety of scenarios for the future of global energy markets, focusing on factors that could trigger a regional or worldwide crisis. The study assesses the geopolitical risks currently facing international energy markets and the global financial system. It also investigates the consequences that such risks could pose to energy security, pricing and supply as well as to the transparent and smooth operation of the global market for oil trade and investment.

Finally, researchers developed a concrete menu of policy recommendations to strengthen the stability of global energy and financial markets in order to withstand possible shocks and geopolitical threats, including strategies related to enhancing diversification, alternative energy technologies, multilateral energy trade accords, emergency market procedures, and economic reform and privatization in the Middle East and Russia. By analyzing these threats in depth, the study aims to develop a series of policy frameworks that can be used to fortify the current market system and ensure that it can respond flexibly to the array of threats that might be encountered in the coming years.

Policy Report and Working Papers

Baker Institute Policy Report 37 on The Global Energy Market

Energy, Financial Contagion, and the Dollar
Mahmoud El-Gamal, Rice University Department of Economics, and Amy Myers Jaffe, Wallace S. Wilson Fellow in Energy Studies, Baker Institute

This research project takes into account the operation of the global energy market and risks to its continued smooth operation, analyzing past crises from the 1970s and the econometrics of extreme co-movements of financial variables. This study will cover the effects of fluctuations in energy prices on the flow of petrodollars, the demand for dollar-denominated bonds, changes in levels of U.S. debt, and swings in financial markets. The impact of such effects will be investigated, by quantifying the “tail-dependence” (that is, the extent of extreme co-movements) of various global economic and financial variables, and then combining the results with our best estimates of potential extreme movements in energy prices driven by a variety of economic and political factors. This investigation shall be conducted by using econometrics study of historical movements and scenario analysis to study various possible outcomes that could lead to a breakdown in the operation of global energy markets.

Scenarios include the following: financial crisis linked to collapse of the dollar; financial/economic crisis linked to a major terrorist event; resort to use of oil as a lever or weapon of international relations by a major energy producer or group of producers; cut off of Russian energy to Europe; bilateral or multilateral alliances of energy users/suppliers that threaten the transparent, global nature of energy movements and trade; broadening of Middle East conflict involving major energy producers such as Iraq and Iran and Saudi Arabia.

The Future of Russian Natural Gas Exports 
Kenneth B. Medlock III, Energy Fellow, Baker Institute and Peter Hartley, Professor of Economics, Rice University

Recent Russian natural gas export policy is an example of the possible use of energy exports as a coercive vehicle. Resort to use of natural gas as a lever or weapon of international relations by a major energy producer or group of producers remains a major threat to international energy security. In particular, European nations have become increasingly concerned about the geopolitical and economic impact of a threat to cut off of Russian energy to Europe. The Baker Institute researchers will conduct analysis of the impact of certain Russian natural gas export policies on European and international LNG markets by utilizing its World Gas Trade Model. Using this model, the Baker Institute investigated scenarios where Russian gas exports to Northeast Asia via pipeline were constrained as a result of conflict on the Korean peninsula. This work will be extended to consider various scenarios for the shut off of Russian gas to European markets either unilaterally or in concert with other gas producers as well as scenarios where gas production and export infrastructure investment in Russia is delayed, causing a reduction in the amount of supply available for export.

Iran, Energy and Geopolitics
Daniel Brumberg, Georgetown University,  Jareer Elass, Consultant, Amy Myers Jaffe, Wallace S. Wilson Fellow in Energy Studies, andKenneth B. Medlock III, Energy Fellow, Baker Institute

Researchers will update ongoing analysis of the policies of Iran and the impact of conflict in the Middle East on oil supply, pricing, security and geopolitics. Focus will include extension of the Baker Institute’s work on the internal political competition for power inside Iran and how it affects its energy industry and foreign policy, related risks to the Strait of Hormuz and terrorist attacks against energy targets, and underlying factors influencing regional conflicts in the Middle East, including the internal stability of Iraq, political, religious and social divisions and tensions between Shia and Sunni populations, and the Arab-Israeli peace process.

Militarization of Energy: Geopolitical Threats to the Global Energy System
Amy Myers Jaffe, Wallace S. Wilson Fellow in Energy Studies, Baker Institute, and Ronald Soligo, Professor of Economics, Rice University

The recent tightening of oil markets and the increasing concentration of oil production in the hands of just a few producing countries has led to concerns that global oil markets may not remain competitive and that the interests of the US and the global system could be challenged or compromised by a major energy producer or group of producers or by an alliance of a major consuming countries or group of consuming countries with producing countries to the detriment of the international community and international trading system. The increasing concentration of control over gas and oil resources raises the question of whether confidence in the continued existence of an open and liberal oil and gas trading system will survive in the face of a major supply crisis scenario. Reduction in the number of players means each player will be more tempted to try to extract rents (economic and geopolitical) using the lever of their energy resources.This study will investigate under what circumstances could the world oil market global trading system collapse and if it did, whether there are scenarios under which such a collapse could lead some countries resort to military processes to acquire or control energy supplies. Today, the US and its allies face a set of states with multiple, conflicting interests that are complicated to manage. In fact, in some cases of regionalized matters, weaker states might even joint together to counterbalance US policies or US policies could potentially be perceived as threatening rather than promoting international stability. This paper looks at the potential for failure of the global market in oil and gas and examines the role that Russia alone or in alliance with others might play as a contributor to that failure as well its reaction to it. While it is not difficult to create scenarios that would cause short to medium term disruptions in these markets resulting in significant price increases, generating scenarios that would result in a long term, sustained increase, in prices or permanent interruption in the global trading system for energy is much more difficult. This research project will examine possible scenarios and the resilience of the global oil market to them.

Beyond Science: The Economics and Politics of Responding to Climate Change
Kirstin Matthews
, Program Manager, Science and Technology Policy, and Lauren Smulcer, Program Coordinator, Energy Forum, Baker Institute
Edited by 
Amy Myers Jaffe, Wallace S. Wilson Fellow in Energ Studies, and Neal Lane, Senior Fellow in Science and Technology Policy, Baker Institute

U.S. climate policy is currently in gridlock, and new policies must emerge if the U.S. is to play a significant role in contributing to solutions to the challenges to the global climate from rising carbon emissions levels. The Baker Institute will gather together leading US and international scientists, economists, and policy experts to the Baker Institute to debate and discuss existing and potential policy alternatives to global climate change. A major conference will be held on February 9, 2008, to discuss the current status of the climate change science and the economic impacts of both adaptive and mitigatory policy approaches. The goal of this conference will be to identify problems that prevent policymakers from implementing workable solutions to address climate change. The conference discussions will address the current gridlock in forming U.S. climate policy and offer policy alternatives through presentations and submitted papers. The conference report will highlight new and more effective policy solutions for the US and provide a more comprehensive understanding of the existing alternatives open to the G-8. Presentations will cover the range of alternative strategies to mitigation such as alternative energy, coal technologies and carbon sequestration, conservation, and energy efficiency.

Nuclear Power Trends in the World
Jorge Gonzalez-Gomez, Rice University Department of Economics, and Peter Hartley, Professor of Economics, Rice University

The Baker Institute modeling team has investigated simulations that quantify the energy security value of nuclear power generation in Japan, giving consideration to the magnitude and probability of sudden cost increases or supply shortages of imported oil and gas and the damage that can come to the Japanese economy from such price increases or supply disruptions, including loss of GDP. In light of rising oil and gas import costs to Japan, this research project will revisit the role that nuclear power plays in expanding energy security to Japan and look at the whether there is an optimum level for nuclear power given economic, environmental and diversification goals. By examining the case study of Japan, it is hoped that the role of nuclear power in response to the 1970 oil crises can be highlighted and examined as to its future potential. Other case studies will also be considered including the expansion of nuclear power in Texas (considered a proxy for US markets) and the potential for nuclear power in new markets such as the growing electricity market of Mexico.

U.S. Energy Policy and Transportation
Kenneth B. Medlock III, Fellow in Energy Studies, and Amy Myers Jaffe, Wallace S. Wilson Fellow in Energy Studies, Baker Institute

Driving is part of the American way of life. While the United States represents 5 percent of the world’s population, Americans use more than 33 percent of all oil consumed for road transportation. This compares to China, for example, which has a population four times that of the U.S. but today uses only about 5 percent of the world’s transportation fuel. The future of US transportation sector policy has huge implications for the global balance of oil supply and demand and is a major factor in international energy market trends. This research project will lay out the basic statistics and policy options facing the US transportation sector and look at the role of conservation, biofuels, CAFÉ standards, taxes and improved car technology in reducing the growth in US gasoline demand.

Oil and Terrorism
David Bryan Cook, Assistant Professor of Religious Studies, Rice University

Oil and terrorism: as oil is one of the major resources if not the major resource of some of the major Muslim countries, it is critical for radical Islamic groups to both deny their own governments (against whom they are rebelling) the revenues derived from oil, as well as create a sense of crisis in the world oil market that terrorist attacks can generate. Targets can be oil production facilities, oil pipelines, large tankers or even the offices of oil companies located in oil-producing countries. Although radical Islamic groups have carried out a number of paradigmatic attacks they have yet to create the full-scale chaos that they need or more critically to turn the populations of target countries into sympathetic audiences for their struggle. This paper will examine the trajectory of attacks on oil targets by radical Islamic groups as well as the religious legal literature that backs these attacks up, and note what trends are likely for the future.

Energy Security in a Context of Hyper-Social Mobilization: Insights from Bolivia
David R. Mares, Professor of Political Science, University of California, San Diego, and Peter Hartley, Professor of Economics, Rice University, and Kenneth B. Medlock III, Fellow in Energy Studies, Baker Institute

“Power in the streets” has brought left-leaning governments into office in multiple energy exporting countries (Bolivia, Argentina, Ecuador) and saved one in Venezuela. These hyper-mobilized social movements have created new political risks which have had negative consequences for international investment, energy supplies in neighboring countries and by keeping supplies off the regional market has increased pressure on the already tight international market. This is not a stable situation for either energy markets or national governments. These governments will still need to confront the problem of developing the national resource (for which they need foreign capital and a profitable domestic use of the resource) and satisfying the demands of the people who voted them into office. Any efficient solution for both national and global interests has to find ways to channel political power in the streets back into stable, institutionalized channels of interest representation where bargains can be negotiated. (One can’t negotiate stable, long term deals when bullhorns rally angry people, the symbols of state power [police & army] agitate them, and their leaders aren’t accountable for actually delivering the goods.) Analyzing the Bolivian case requires an interdisciplinary approach. The history that oil and gas, as well as other natural resources, have played in the country’s political economy is a fundamental starting point. The interaction among an array of domestic factors that drive internal politics (racial inequalities, government corruption, the cocaine trade and local autonomy), needs to be systematically analyzed and mapped. International pressures from non-governmental organizations encouraging ‘democracy from below’, international financial institutions promoting market reforms and unstable regional gas markets further exacerbate internal politics. The paper will clarify how these internal and external factors come together to generate hyper-mobilization and the resultant loss of real market opportunities. The economic analysis in the paper will draw on three previous sets of work that have been conducted at the Baker Institute. First, the work on the relationship between economic development, population growth and energy use will be used to inform the discussion of the possibilities for development of the energy industry within Bolivia. Second, the analyses we have previously conducted of the relative merits of transporting electricity versus natural gas will be updated to the Bolivian case. An additional factor in this case is that the gas and/or electricity could be transported in several directions, especially to Argentina and Chile in addition to Brazil. As with the example of transporting natural gas from Siberia to Japan, we once again will have to consider the possibility that developing hydroelectric capacity in Bolivia may favor the transport of electricity rather than gas. Finally, we will use the Rice World Gas Trade Model (RWGTM) to evaluate the profitability of different gas transport routes out of Bolivia. The RWGTM will also be adapted to allow us to calculate the economic rents associated with the exploitation of Bolivia’s natural gas resources and how different scenarios are likely to affect those rents. The RWGTM will also be used to examine the effects on gas prices and production within Bolivia of developing and exporting Bolivian gas. Finally, the model will also allow us to calculate the consequences of Bolivian exports for other countries in South America including the effects on gas prices and trade with the rest of the world.

U.S. Foreign Policy and Climate Change
Matthew E. Chen, Energy Research Associate, and Joe Barnes, Bonner Means Research Fellow, Baker Institute

Climate change has to date played a modest part in U.S. foreign policy. During the Bush Administration, the U.S. international role was largely obstructionist, as the United States withdrew from the Kyoto process and, at Bali, vetoed post-Kyoto mandatory emission limits for developed countries. The position of the Bush Administration has prompted a number of states and localities - most notably California - to move forward with their own programs to reduce greenhouse gas emissions. Climate change has had limited salience in American national politics to date. This appears to be changing as Congress considers a new flurry of climate-change legislation and presidential candidates of both major parties feature climate change policy in their campaigns.   Whoever wins in November, 2008, the next administration is unlikely to be as negative as its predecessor towards international action on climate change. This may still fall short of a formal U.S. participation in an international system of cap and trade. Instead, in the short-term we may see what could be called "convergence," as the United States implements policies roughly consistent with international efforts. While there is important scope for gathering "low hanging fruit" - i.e., fostering energy efficiency - some carbon pricing will clearly be part of any concerted national effort to reduce the growth of GHG emissions.  This can take the form of a carbon tax, a cap and trade system, or some mix of both.

Chinese Policies on Climate Change and Environment Protection 
Xiaojie Xu, Director, Institute of Overseas Investment Climate Evaluation, and CNPC Research Academy of Economics and Technology in Beijing

Climate Policy and Energy Security: Two Sides of the Same Coin?
Peter Hartley, Professor of Economics, Rice University, and Kenneth B. Medlock III, Fellow in Energy Studies, Baker Institute


Research Presentations are available on the following event pages:

Click on the title links below to be redirected...