In a new policy paper, EWI fellow Angelica Austin calls for the creation of an international tribunal to resolve disputes and improve competition in global energy markets.
The financial crisis has highlighted the need for such an inclusive governance structure as pump-priming increases the possibility of political friction between energy producers and consumers. Energy markets, unlike financial markets and other goods and services, are more generally characterized by substantial government intervention. The energy sector is dominated by companies that either had or still do have substantial support from national governments. Beyond the formal state-owned sector, private energy companies have always been under scrutiny and or control by government given the importance of providing reliable supplies of ‘essential services’ and energy security to a country’s people and businesses. This aim of governments has meant that domestic energy policy impacts on foreign policy in a number of ways, including escalating fears regarding resource nationalism when oil prices are volatile.
This paper provides an overview of existing research on the outcomes of government ownership and intervention in the energy sector through the example of state-owned oil companies as they compare with their so-called private sector counterparts. The purpose of this analysis is to improve the competitiveness of the energy sector while settling exaggerated fears regarding the negative eff ects of energy nationalism on the security of supply to other countries. This paper builds on work of the EastWest Institute beginning in 2005 on promoting confi dence, trust and cooperation in global energy security.
Other essential characteristics of energy commerce include the regular occurrence of market failure, information asymmetries and potential market manipulation due to the oligopolistic market power of OPEC and in some cases multinational oil companies. High and rising oil prices in the fi rst eight months of 2008 were in part due to infrastructure bottlenecks and short selling by hedge funds. The collapse in oil prices through October 2008 and since may have brought a sharper realization to many of the most powerful oil companies that they would benefi t from a less volatile, more transparent and better regulated market.
State-owned energy companies will become even more important in coming years. According to the International Energy Agency, in the next four decades, developing countries – most with state-owned companies – will be the source of 90 per cent of all new supplies of oil. According to a Rice University study, state-owned companies already control almost 80 per cent of world oil reserves and will dominate the market in the future.
As a result of consistent market failure in the energy sector, there needs to be a global governance structure specifi cally aimed at regulating it to allow for more transparency and competition. This global corporate governance structure would primarily consist of multinational private energy companies and state owned energy companies. It would promote:
- greater transparency in reporting of government-owned enterprises in the energy sector, based perhaps on the adoption of the Extractive Industries Transparency Initiative
- introduction of domestic regulatory regimes in various countries to incorporate the idea of ‘competitive neutrality’ to provide greater competition between the oil majors and the new “seven sisters”
- energy market reform in the big sister state of origin countries to improve competition in domestic markets and allow for a more even ‘playing fi eld’ to underpin new energy diplomacy between oil consuming and oil producing countries
- introduction of global accounting standards for energy companies that have either a controlling stake or a minority stake held by government to decrease cross subsidies between the domestic, often-legislated monopoly and off -shore investment
- a new complaints mechanism (an International Energy Tribunal) to ensure that that all stakeholder interests can be accounted for. This could be constructed along the lines of the anti-dumping provisions in the WTO or anti-trust procedures in terms of anti-competitive detriment.