Global energy security will top the agenda of the Group of Eight’s next summit, to be held in Russia’s St. Petersburg in 2006. This is a major international problem, and a subject that is overdue to appear on the G-8 agenda. Power engineering is one of the few advantageous areas for Russia; it possesses an increasing energy potential available to its partners for discussion.

There is no clear-cut definition for “energy security.” Experts from the International Atomic Energy Agency define it as a concept aimed to protect customers against any interruptions in their energy supplies due to emergencies, terrorism, underinvestment in infrastructure, or poor organization of markets. Developed countries have learned to protect themselves against emergencies with the help of strategic oil reserves of their own. It is probable that the energy security debate will soon focus on the organization of markets and on a wide range of issues pertaining to the access to resources.

If Russia considers itself a full-fledged member of the “elite club,” it must approach this discussion from the perspective of objective interests of the international community, rather than try to use the favorable situation on the market in its own interests. Russia must avoid the temptation to merely “sell energy resources,” but rather contribute to the creation of a more stable international energy mechanism, which, in turn, would broaden our possibilities on the international energy markets. With this goal in mind, it is important to ask what would be the most logical subject to discuss under Russia’s G-8 leadership.

THE G-8 AND ENERGY SECURITY

It would be an illusion to think that discussions within the G-8 framework are capable of bringing humanity any closer to the solution of its energy problems. The G-8 is not a monolithic body, and its status is rather vague. At the same time, it is important not to underestimate the importance of discussions between world leaders concerning global problems – especially concerning those fields where Russia is evidently competitive and has vital interests.

In general, it is untypical of the G-8 to undertake a systemic approach to solving the specific problems facing humanity. Within the framework of this forum, contacts between the leaders per se are often more important than results. Nevertheless, starting from the 2000 summit in Okinawa, energy issues have been invariably mentioned in the final documents of G-8 summits (although in brief and mainly in the context of the development of renewable energy sources and efforts to combat global climate change). Over the last eight years, the G-8 energy ministers have held two special meetings where the focus was on global energy security. At one such meeting, held on May 3-4, 2002 in Detroit, the ministers formulated the basic principles of international interaction in ensuring energy security. The last few years have been marked by stepped-up bilateral “energy dialogs,” in which Russia is taking an active part.

These discussions brought out several problems of top priority.

First, it is obvious that within the next few years the oil issue will continue to dominate the global energy dialog. Competition between different energy sources (natural gas, coal, nuclear energy, and renewable and alternative sources) is possible only in stationary power engineering (most importantly, in electric power engineering), where, incidentally, oil consumption has decreased to a record low in recent decades. However, humanity’s “mobility” now directly depends primarily on oil: in the transport sector of the world economy, which is vital for global economic growth and globalization itself, there are no alternatives to oil as a fuel. Moreover, oil is the most “globalized” energy commodity in the world: more than 55 percent of the world’s oil output sells via transborder trading operations (as compared with 33 percent of the world’s natural gas and less than 20 percent of the world’s coal sold worldwide).

Second, deepening globalization, together with a move on the part of many national economies, including Russia, toward greater openness assigns special importance to the stability of global energy markets.

Finally, third, the development of alternative, environmentally friendly technologies for energy generation, which help achieve the “energy equality” of nations, as well as decrease humanity’s dependence on fossil fuel, must be the genuine mission of the G-8. In order to accomplish this task, the mission must comprise not only the major net-importers of energy resources, but also those states capable of making a significant intellectual contribution.

GLOBAL ENERGY MYTHS

In organizing a discussion concerning the world’s energy problems, it is extremely important to put aside the numerous superficial ideas about the functioning of global power engineering, and, most importantly, some misleading myths that have recently taken root in the world press and the expert community.

One of the main myths stems from incorrect estimations about particular developments on the global oil market, as well as the exaggerated negative influence that high prices have on the economies of developed countries, which allegedly forces world leaders to lower oil prices at any cost. Some analysts argue in earnest that the Western countries are interested in a “package of measures” to cut world prices. These measures, they say, may include the creation of “buffer oil reserves” that could be released on the market when prices hit a peak and need to be reduced.

Proposals of this kind are based, first, on an incorrect interpretation of the global oil price situation, not to mention the motives of the governments of developed countries. Second, they are based on a simplified view of the system of price formation on oil markets. Undoubtedly, high oil prices do have a negative impact on the development of the world economy, above all the economies of net oil importers, many of which receive representation in the G-8. According to well-known estimates of the International Monetary Fund and the World Bank, high oil prices can reduce global economic growth rates in 2005 by 0.25-0.5 percent.

However, the integral influence of high oil prices is obviously positive for many parties. First, apart from Russia, three other members of the G-8 – the United States, Great Britain and Canada – are major oil producers and exporters; their oil exports amount to 50-100 million tons a year and the present situation on the oil market is very advantageous for a large part of their economies. Second, beneficiaries include Western oil and gas corporations (as well as financial institutions providing them with investment financing) which participate in oil extraction projects around the world, thus exporting highly qualified personnel and technologies, while often repatriating the capital earned.

Finally, since the mid-1980s, global oil prices form on the financial markets of Western countries, where Western financial institutions trade not in actual oil but in derivative instruments, as opposed to the “outlet” point of the producer countries (the “Franco border of Saudi Arabia”). Oil futures are a way to place capital, and good incomes are earned on the high prices, above all, by hedge funds. Of course, a large part of the incomes is redistributed in favor of the producer countries; however, it would not be right to say that their economies are the only ones that gain from the high prices.

Incidentally, in 1979-1981, world oil prices were 25 to 30 percent higher than current prices, if estimated by current exchange rates (by the 2004-dollar rate). Thus, although there are grounds for concern, it would be wrong to say that today’s prices have reached their highest levels that are fraught with catastrophic consequences.

As for the system of price formation on the global oil market, Western leaders perfectly understand this mechanism and realize that a policy of short-term influence on the market does not play a significant role, unlike fundamental factors. Indeed, there is no shortage of oil on the market, and the maximum margin between oil output and consumption over the last decade has stood at about 2.5 million barrels a day. Annually, this is about one-third of the total amount of the permanently maintained commercial oil reserves in the member countries of the Organization for Economic Cooperation and Development (OECD), which during the last decade have been alternating between 2.4 and 2.7 billion barrels. This shortage permits the market to operate at a rather comfortable level (the reserves easily cover the gap between oil output and demand). High oil prices are the result of investor uncertainty about fundamental factors (for example, if oil supplies will be able to keep pace with increasing demand, and how long the sharp increases in the demand for oil will last) which determine supply and demand in the long term.

In 2004, the growth rate of global oil demand hit a record 3.4 percent, with China and other developing countries of Asia in the lead (they accounted for about 0.5 percent of the increase in demand). The growth in oil consumption was particularly high in China – 15.4 percent (this country posted a two-digit increase in demand for the second year running). However, many experts allay possible fears concerning these figures: approximately half of the increase in the demand for oil in China, as well as in other Asian countries, was provoked by a shortage of electric power plants (the inert energy sector cannot keep up with the rapid development of the economy) and by the large-scale introduction of diesel generators. Obviously, this situation will not last long, and additional electric power plants are in the cards. These will operate on natural gas, coal or nuclear energy. However, even if the rapid growth of the Chinese and other Asian economies continues, it will no longer result in an astronomical increase in the demand for oil.

As for the oil supply, that is, the ability of the world oil industry to ensure at least a moderate increase in demand (within two percent a year), one cannot be as confident about this issue in the long term, despite the present calm situation. Although, even according to the most conservative estimates, mankind is ensured oil resources for some 40 years ahead (these resources are regularly reproduced, although official estimates in 1980 said that oil in the world would end up by 2010), 75 percent of these resources is concentrated in the member states of the Organization of Petroleum Exporting Countries, where the ruling regimes are politically unstable and the future is obscure.

RUSSIAN RESOURCES AND GLOBAL DEMAND

Global oil security largely depends not on the present situation on the market or mechanisms for influencing it, but on the following two fundamental factors:

1) Confidence about the availability of oil resources, and transparency of information;

2) International access to oil resources.

Therefore, confidence building with regard to international oil resources can find a place on the agenda of a G-8 dialog on global energy security.

There is no need to invent anything special for such a proposal. In 2000, six major international organizations – the Asia Pacific Energy Research Center (APERC), the Statistical Office of the European Communities (Eurostat), the Latin American Energy Organization (OLADE), the International Energy Agency, OPEC, and the United Nations Statistics Division – introduced the idea to develop a unified international mechanism for collecting and universalizing data on global oil resources and access to them. This mechanism (since April 2003, officially named the Joint Oil Data Initiative, or JODI) ensures high oil data transparency. Moreover, it works to stabilize the global oil market by providing reliable information to traders, who often must rely on rumors.

Support for JODI may soon become a key element of the global energy dialog, and Russia must take this into consideration when preparing for the G-8 summit in St. Petersburg. It would be very useful for it to take the initiative in promoting standards of international oil data transparency. To this end, however, it will have to resolve some important internal issues. First, information on oil resources in Russia is classified. Second, the Russian methods of evaluation of its oil fields do not correspond to international standards. Whereas the second problem, for all its complexity, is purely technical and therefore soluble, the first one is rather a matter of philosophical choice. It is difficult to name the reasons why it is disadvantageous for Russia to declassify data on its oil reserves, but it seems that such a move would add to Russia’s status as a world energy power, while allowing international financial markets to re-evaluate Russian energy companies.

Access to resources is a more difficult problem. Its solution may take different approaches – from a possible revision of the concept of international sovereignty with regard to countries where vital natural resources are concentrated (such an idea is absolutely marginal and unacceptable in essence, however, looking at the international politics, it is difficult to assert with confidence that it has no future), to the stipulation of terms for the participation of transnational corporations in the development of oil and gas fields in various parts of the world, as well as in large international infrastructural projects intended to ensure the delivery of resources to the world markets.

Russia is interested in discussing these issues within the framework of civilized mechanisms that would rule out marginal scenarios and protect nations’ right to an independent policy. It would make sense to focus the discussions on such issues as: 1) an international regime for implementing infrastructural projects (presently, multinational projects of this kind are implemented on an individual basis, and political risks are regulated in the “manual control” mode); 2) international standards for granting access to energy resources.

The solution of the first problem would greatly improve Russia’s image as an international transit power, since high political risks now cause other countries to bypass Russia (e.g. the Baku-Tbilisi-Ceyhan and Baku-Tbilisi-Erzurum corridors; the TRACECA (Europe-Caucasus-Asia) transport corridor; the planned Turkmenistan-Iran and Iran-Turkey gas pipelines; and the idea to build trans-Caspian pipelines).

As for the second problem, Russia will most likely have to answer some inevitable questions during discussions in St. Petersburg. They concern, above all, terms for international corporations’ access to Russia’s oil and gas resources – a subject actively discussed of late in connection with the drafting of a new version of Russian legislation on mineral deposits. In addition, there are plans to limit the rights of foreign investors in the development of Russian oil and gas fields. However, the existing version of the bill on mineral deposits does not specify the legal regime for foreign companies in this sphere. It is believed that this regime will be largely determined by individual decisions of executive power bodies. In addition, there are no definite criteria for classifying oil and gas fields as “strategic” (where foreign participation is planned to be limited).

Russia should not avoid this discussion, but rather try to settle outstanding issues. For example, foreign investor limitations would only reduce the effectiveness of the Russian oil and gas sector and not bring any benefits to Russia. What ultimately matters is the effectiveness of state regulation, not the citizenship of the investor. If Russia really wants to be a full-fledged member of the community of civilized countries, it must make it clear what foreign companies can do and what they cannot do according to the Russian legal system. In the other member states of the G-8, the legal environment is built precisely on such principles. There is a general belief that even if Russia introduces stricter yet better-formulated, direct-action laws for foreign investors, the move will be met by the developed countries with more understanding than statements like “You shouldn’t worry, the matter at issue is only five or six fields which we will name later.” But if the law on mineral deposits is adopted before the St. Petersburg summit begins (which is possible), Russia will only gain in terms of its image and thus avoid unnecessary discussion at the forthcoming summit.

In comparison with such fundamental issues, it makes little sense discussing secondary issues like the use of strategic oil reserves of developed countries for short-term market influence. The G-8 energy ministers at their meeting in Detroit already rejected such ideas. The main drawback of these proposals is that they look at consequences (current prices) rather than the cause, that is, the basic expectation of an oil shortage in the future. Furthermore, the fundamentals of the market economy do not inspire hope that the governments of the developed countries can determine the so-called fair oil price (or price corridor), or that a “fair” price, determined subjectively, is even possible (try, for example, to determine the “fair” market exchange rate of the ruble!). Incidentally, OPEC’s idea of a “fair price corridor,” proposed at U.S. $22-28 a barrel and widely publicized by the organization several years ago, was a complete flop because it was pure political speculation and had no relation to the real processes occurring on the world oil market.

The energy agenda of the G-8 will inevitably include the development of alternative energy sources. These comprise, most importantly, hydrogen technologies, which provide humanity’s main hope for a possible oil substitute in the transportation sphere. Russia can make a major contribution to this discussion: Russian developments in hydrogen power engineering, financed by Norilsk Nickel, have received much publicity of late. Russia has good chances to become an international center for the development of economically effective hydrogen technologies, and the G-8 summit can assist in these efforts.

In conclusion, these global energy issues could make the agenda of the G-8 summit in St. Petersburg in 2006, and help the parties to put aside their “marginal ideas” and focus on several important priorities concerning global energy security. If Russia comes out with such an agenda, it will have a good opportunity to improve its international image, as well as strengthen its role as a global energy power.