Energy as a lever of power and shifting power balances
Speech van de minister van Economische Zaken, mevrouw M.J.A. van der Hoeven, tijdens een internationaal congres op de VU van de European Association for Environmental and Resource Economics (EAERE), de Europese vereniging van energie/grondstoffen- en klimaateconomen. Donderdag 25 juni van 11:15 tot 11:45 uur.
Ladies and gentlemen,
It is a pleasure to be here at VU University today and to have the chance to talk to you, the scholars and scientists who are searching for solutions to the major issues surrounding energy and raw materials.
To understand these issues, we often need to resort to models. They provide a simplified version of the complex realities, yielding knowledge that can prove crucial in the long run. As a politician, I can put this knowledge to good use. But I have to apply it to practical policy issues in a complex world. A world where markets fail, where economic agents are not always rational, and where the international balance of power is shifting. Today I'd like to explore these themes and their significance in terms of the international energy market.
The international energy market is a prime example of a market where power is held by parties on both the supply side and the demand side. And of a market that does not function perfectly, where there is a place for government intervention. These characteristics are heightened by the unmistakable trend towards greater energy scarcity and state ownership of raw materials in non-market-oriented economies. It is against this backdrop that I want to look with you today at the importance of energy as a lever of power, and the need for governments to play an active role.
Before I talk about what that role entails, I'd like first to consider the dynamic environment in which we now live: the crisis, a changing world and the gaps in global governance that have appeared.
The international energy market is a prime example of a market where power is held by parties on both the supply side and the demand side. And of a market that does not function perfectly, where there is a place for government intervention. These characteristics are heightened by the unmistakable trend towards greater energy scarcity and state ownership of raw materials in non-market-oriented economies. It is against this backdrop that I want to look with you today at the importance of energy as a lever of power, and the need for governments to play an active role.
Before I talk about what that role entails, I'd like first to consider the dynamic environment in which we now live: the crisis, a changing world and the gaps in global governance that have appeared.
Shifts in international power balances
The crisis is making people and businesses feel insecure. If a country's economic standing changes, so does its relative power in the world. New players are emerging. We have seen the rise of the 'Asian tigers'. The BRIICs - China, India and Indonesia from Asia, plus Brazil and Russia - are an emerging power bloc. The international situation is a very dynamic one. China, for example, has grown enormously in stature in just a few years. It has practically outgrown the BRIIC framework. Russia, on the other hand, seems to be on the wane. That being said, most observers think its energy reserves will form the basis for its resurgence in due course. So the balance of power is certainly shifting. Because the situation is so dynamic, we cannot yet see clearly what the world's new geopolitical contours will be. That too makes people insecure.
What we can say for certain is that the US, Japan and Europe - and within Europe the big three of France, Germany and the United Kingdom - will no longer control the global agenda. The G20 showed that far more countries must be given a say. It is clear that progress towards a stronger global governance structure is essential if we want to shake off the current crisis.
For some, a new global governance structure is an alarming prospect. They fear that emerging powers will exert an influence inspired by ideologies quite different from their own. They say that companies in these emerging countries operate differently from those in the countries that come under the umbrella of the OECD. Government influence often reaches further in the new economies than in the West. There is no point denying this. We have to recognise it and decide how we are going to deal with it.
It is rarely wise to make decisions on the basis of insecurity and fear. The current crisis has clearly shown that globalisation results in greater economic vulnerability if there are failings in the regulation of global markets. These are often referred to as gaps in global governance. This means that global governance and the institutions responsible for it, like the WTO and the IMF, must be strengthened and better harmonised. It also means that the international legal order must be reinforced. The current crisis offers a window of opportunity for doing just that.
So while a new global governance system may be an alarming prospect for some, we must not lose sight of the fact that globalisation has brought increasing wealth for many people. The burdens and the benefits are generally shared. And when the economy starts to pick up once again, it is through globalisation that the recovery will spread. And certainly when it comes to global governance, globalisation creates the channels that enable us to share solutions with each other.
The traditional Western powers cannot dictate the design of the new global governance system. New emerging economies must be involved. Indeed, their emergence makes it more rather than less likely that the gaps in global governance will be filled. This will result in a new balance. Will this shift entail a radical change towards non-market-oriented economies? Not necessarily. Although we can safely predict that countries which work in a different way to ourselves will play a bigger role, the fundamental importance of international markets will remain.
Energy will be an increasingly important factor
International markets for energy and raw materials have been severely overstretched in recent years. Growing demand, from China in particular, sent the price of oil soaring to 145 dollars a barrel. The price then dropped to 40 dollars, before rising again to the current 70 dollars. These fluctuations cannot disguise the fact that energy is a seller's market. Sellers are well aware that growth is based on the availability of sources of energy. As energy producers, they now hold an important lever of power. Increasingly, we see that energy reserves are becoming concentrated in just a few countries. Often countries where national oil companies hold a dominant position. This increases the convergence of market power in the hands of suppliers.
But there are changes on the demand side too. There is a clear shift in the centre of gravity, away from the US and Europe, and towards Asia. For it is in Asia that growth is expected to be concentrated in the twenty-first century. This shift will mean greater competition for energy. And dependence on imports will increase.
Is import dependence a threat to our security of supply? Generally speaking it is not. Just under two hundred years ago, Ricardo demonstrated that specialisation and international trade give rise to greater prosperity. His theory holds equally true for trade in energy. But in practice there are difficulties, because of the power held by some players in the market. Governments in energy-producing countries are heavily dependent on sales of raw materials for their economic health and general stability. So they keep tight control over their energy exports. This also enables them to use energy as a political tool. Energy is after all a strategic good. Countries can use it to exert pressure on others. We have seen this happen in the past, and it is likely to happen more often in future as energy becomes scarcer and no alternatives are available to customers.
That being said, it is vital we remember that although the energy market is increasingly a seller's market, producers and consumers are dependent on each other and will remain so. Energy may be vital for us, but it is equally vital for producers that we carry on buying that energy in sufficient quantities. And more generally, the major energy producers are heavily reliant on revenues from oil and gas to feed the state's coffers. We talk about security of supply, but the concern for producers is security of demand. They look on anxiously as prices fluctuate and Western countries focus more on efficiency and new sources of renewable energy.
Producing countries are trying to diversify their economies and become less reliant on demand for fossil fuels. The balance of power may shift from time to time, but there can be no doubt that buyers and sellers are mutually dependent. This also means that we have to think carefully about what we can offer producing countries.
Government role
Faced with shifting power balances in the world, and the increasing impact of market power and political influence on international energy issues, we in the Netherlands have to ask ourselves 'how should we respond?'.
The government clearly has a role to play in the area of energy. I see a number of possibilities. Europe certainly has a key role. Within Europe, the Netherlands also has a part to play. For example, effectively pursuing economic diplomacy. Seizing the many opportunities that public-private partnership offers. The government can make an important contribution here. Let me look at these elements in more detail.
Europe
First of all, Europe has an important part to play. It is vital for Europe to take a consistently pragmatic approach. Europe is a large market with purchasing power. But power politics is not Europe's strong point. Anyway, muscle-flexing doesn't necessarily bring about the desired effect.
In my view, practical bilateral talks between countries and cooperation based on shared interests, in settings like the International Energy Forum or the International Energy Agency, offer the best prospects for the future. As a rule, we favour a pragmatic way of thinking, but when others think primarily in terms of power, we don't shy away. For example, we want to take part in the Forum of Gas Exporting Countries as an observer. Sometimes referred to as 'Gaspec' by analogy with OPEC, the Forum is where gas-producing countries discuss developments on the gas market and share knowledge.
As we get closer to Copenhagen, we need to make agreements on energy and climate. But how? I'll restrict my remarks on this issue to energy. Energy supply security in the Netherlands is dependent on a European approach first and foremost. A united Europe, with an efficient internal energy market, is in a strong position vis-à-vis producer countries.
At present, a diverse range of EU instruments are currently available or in development. There is also an external dynamic, particularly in the form of new Russian proposals and new global arrangements on energy and supply security. In their proposals, the Russians also address the crucial importance of reliable transit routes. I would like to add reliable transport routes to that. The problems in Ukraine directly affect Europe's supply security. Piracy is on the rise; it is a threat and it must be stopped.
It is important to maintain a proper balance between public and private interests. Energy supply security is essential to every country, and for all of Europe. Of course, we can make laws and set rules, but it is business that produces, transports and delivers energy to households and companies. The way in which business and government work together - in Europe as elsewhere - is crucial to our short and long-term supply security.
The Netherlands in Europe
A European approach and a bilateral approach can complement each other. The Netherlands would like to see more solidarity among the member states. But clearly every member state is responsible for its own supply security. Let's end the debate about the divisiveness of pursuing national activities within the EU. I would venture to say that the Netherlands is in a position to contribute to the debate at European level precisely because it maintains independent relationships with important producers.
Besides, there is a distinction between levels here. The EU is the logical and relevant level for legislation. In Brussels we set out a common approach to third countries, and accordingly to non-EU energy suppliers. I work within that European framework to do business, open doors for Dutch companies and draw attention to the Netherlands' position as a gas roundabout, through bilateral relations and in collaboration with business. This is the level at which commercial opportunities arise and where real cooperation takes shape. Combining agreements on energy supply with projects to improve energy efficiency is just one example.
The investments we make serve Europe's interests. The Netherlands is currently positioning itself as a 'gas roundabout' for Northwest Europe, an important logistics hub for the storage and transport of gas flows. The knowledge, infrastructure and logistics experience that the Netherlands has in abundance is being put to good use and benefiting both Europe and Dutch companies.
Economic diplomacy
As I mentioned earlier, in our economy business is responsible for economic transactions. The same is true in the energy market. Companies are the key to securing our energy supplies. Companies make the decisions about investing in infrastructure and raw materials. The EU doesn't buy gas, companies do.
But national governments, too, have a role to play in many markets, especially in the complex, international markets for energy and raw materials. National governments can work for producers and consumers alike. By, for example, intervening in producer countries on behalf of their own population and securing cheap energy for their own industry.
Overdependence makes us vulnerable, so we don't permit ourselves to rely too heavily on a single supplier or fuel. Instead, we diversify. We do that nationally by making significant investments in sustainable energy sources, and we do it internationally by maintaining relations with several countries: Russia, Algeria, Angola, Qatar and Egypt. Energy-producing countries are also diversifying to make their economies less vulnerable.
In this field of influence, I see an important role for diplomacy and powerful public-private collaborations. Together we stand stronger. Business and government need to join forces and sit down with international partners to discuss what they want from each other. But before we talk to others, we need to think about what the Netherlands and Dutch businesses have to offer, and what we want from our partners. It also means listening carefully to what our energy partners need and responding to those needs as best we can.
Public-private partnerships increasingly valuable
It is important for public authorities and members of government to mediate in large infrastructural projects, particularly those that span national borders. Energy involves major investments in complex projects and long-term commitments. So mutual trust is vital. Forging that trust is where I come in. Building relationships between countries is partly about building personal relationships. A crucial moment in bilateral contacts is when government ministers talk to each other. That's my speciality. I'd like to give you an example that illustrates what I can do in my capacity as Minister of Economic Affairs.
The Netherlands is a powerhouse in the areas of energy and water. That's because we work with ingenious concepts for sustainable water management and sustainable development of energy sources. You cannot simply sell concepts in other countries. To apply them elsewhere, you have to consider the situation as a whole and participate in developing the masterplan.
This involves, for example, talking to your foreign partners about the masterplan for water management in Jakarta, dike security in New Orleans or sustainable gas extraction in the Russian Arctic. In every country, masterplanning is the province of public authorities, and companies are not natural partners for public authorities. Especially when those companies are Dutch and they want to talk about introducing new concepts. That is why it is smart for Dutch public authorities to work with collectives of Dutch companies and knowledge institutes. The PPP structure enables us to engage foreign parties in a dialogue about solid Dutch concepts, provided we start the dialogue at an early stage and at the right level.
Our companies and our technologies are often seen as expensive, but when they are part of an integrated Dutch concept our solutions are better, cheaper and more durable. But to get that across we need to start talking with our foreign partners at the strategic level. It is important to focus on large-scale priority projects and not to spread ourselves too thin. Pursuing projects in multiple locations around the world would require an intensive, long-term dialogue.
So we are selective in choosing priority energy countries. We pursue broad, intensive economic diplomacy with those countries and with our partners in those countries. And that has proved to be a successful approach.
Conclusions
Ladies and gentlemen, I have come to the end of my remarks. I'll conclude by summing up a number of important developments and challenges in the approach to international energy issues.
Shifts in the international balance of power are making the division of tasks between public authorities and businesses in the energy sector more complex than ever before. Big changes are happening in international energy markets, driven by increasing scarcity, concentrations of reserves and the reality of market power. We don't know for sure where these processes will lead. But it is clear that public-private partnerships and Europe's role are important. The challenge is to strike a balance between confidence in international markets on the one hand and effective economic diplomacy on the other. Government has a material role to play in both economic diplomacy and public-private partnerships.
It is essential to maintain a course towards sustainability. In the longer term, we will have to make the transition from fossil fuels to renewable energy, compelled by either climate considerations or economic factors. Europe's reserves are diminishing rapidly, so it is vital to ensure that renewable energy gets off the ground. In time, renewables will serve as a counterweight to oil and gas producers, which currently dominate the markets. In addition, generating renewable energy is essential to tackling the climate problem.
A global climate agreement is vital to the interests of international energy relations. And a joint agreement must provide direction. That is why the Copenhagen climate conference is so important: it must produce an agreement, a solid framework for a truly global approach to climate change. It must result in increased security and create a context in which investors are able to make more accurate assessments. This will generate the confidence that is sorely needed.
With a new Copenhagen agreement, new European legislation and new European instruments for external relations, we can make international energy markets work better.
Thank you.