The Future Role of the IEA
I am grateful for the opportunity to join you this evening, particularly to commemorate this auspicious occasion — the 35th anniversary of the establishment of International Energy Agency. Feeling like its father, I take special pride in being here. Much has changed since 1973, and I believe that the IEA now stands at a critical juncture that beckons a thoughtful contemplation of its future.
Over the course of my lifetime, I have become many things, but an energy expert is not among them. Consequently, I am reluctant to offer specific prescriptions for how the IEA should evolve. There are many in this audience better suited to that task. But what I can offer are a few observations on the challenges and realities that confront us today, and thoughts regarding some of the key issues that the IEA and its member countries must surely address as we collectively grapple with shaping the world around us.
1973-1974: The Energy Landscape and Beginnings of the IEA
It was nearly 36 years ago, in the midst of the 1973-1974 energy crisis, that I addressed the Pilgrims of Great Britain in London. The futures of our Western nations — the United States, countries of Europe, Japan, and Canada — had long been inextricably linked, both in economic terms and through our security arrangements. The energy crisis awakened us to a new challenge that would require both creative thinking and international cooperation in order to preserve and further our collective well-being.
Although a crisis had been looming, it was the October 1973 Arab-Israeli war and subsequent embargo that exposed the vulnerability of the energy system. This came as somewhat of a surprise. Oil supplies had been affordable and seemingly plentiful, and so it was hard to envisage the resulting disruption and price spikes that ensued. To say we were complacent is an understatement. I recall that the Shah of Iran had offered the United States a long-term deal for oil supplies priced at $1.00 per barrel. It was an offer that we rebuffed.
Oil had become the engine of choice to power the Western economies. It sustained industrialization and fueled an unrivaled expansion of vehicles and infrastructure for transport. In the late 1960s and early 70s, economic boom conditions simultaneously occurred in the United States, Europe, and Japan with GDP at peak levels for the two years immediately prior to the embargo. Between 1960 and 1972, oil’s share of worldwide energy consumption jumped from 35 to 42 percent. As demand climbed and United States’ supplies peaked, industrial nations, including our own, increasingly came to rely on imports. This situation ultimately jeopardized our common energy security.
In my December 1973 speech to the Pilgrims of Great Britain, I suggested a massive effort to provide producers an incentive to increase their supply, to encourage consumers to use existing supplies more rationally and to develop alternative energy sources. In the months that followed those remarks, swift steps were taken by industrialized nations to define broad principles for international cooperation and to determine initial actions that would be taken to rectify major challenges that confronted our energy system. In November 1974, the International Energy Agency was established within the framework of the Organization of Economic Cooperation and Development, carrying a broad institutional mandate to foster improved energy security through cooperation on energy policy between major consuming nations. Original membership included seventeen industrialized countries which, at that time, accounted for 60 percent of global energy demand. The rest, as they say, is history.
Successes of the IEA
Since that time, we can point to a number of invaluable actions that the IEA has taken to improve global energy security:
– Thanks to its 90-day strategic oil stock requirement and response mechanism, we now have a proven crisis management system that works. It remains our best protection against sudden oil supply disruptions;
– The IEA has filled an important informational void, promoting market transparency through the collection and publication of timely and reliable data;
– It provides helpful analysis to inform the energy policies of its member countries;
– The IEA has taken on a critical role in supporting energy technology agreements and projects;
– Thanks to the IEA, member countries also possess remarkably consistent energy policies that encourage greater diversification of energy supplies (including nuclear, renewables and alternative energy forms), reduced dependence on oil (particularly imports), and promotion of energy efficiency and conservation.
Indeed, the IEA has been responsible for great progress in the 35 years since its creation. Yet as we look to the future and contemplate the role the agency can and must play in a changing energy world, we need to recognize how both global markets and geopolitics have evolved. This must begin with an examination of the realities of today.
Realities of Today
In many ways we are confronted with a parallel, albeit broader, challenge to the one we faced in 1973-1974. At its core the energy system is again on an unsustainable path, threatening the political, economic, and social stability necessary for continued world progress.
Energy security endures as a central and concerning feature of the current landscape. We remain challenged to ensure the availability of reliable and affordable energy supplies to maintain economic growth. Propelled by rising populations and brisk economic growth in developing nations, increasing energy demand threatens to outpace our capacity to produce and deliver needed energy supplies. This rise in non-OECD consumption represents a watershed event in a changing market landscape. The developing (rather than the developed) world is expected to account for the lion’s share of global energy demand growth for the next several decades. The IEA’s own projections indicate that portions of the Middle East, China and India will be primarily responsible for future growth in energy consumption as OECD demand stagnates.
Oil continues to be a vital part of our energy mix, particularly in the transportation sector as we remain without viable alternatives that can substitute at meaningful scale anytime soon. Despite impressive advances in technology, conventional oil supplies are becoming increasingly concentrated geographically and difficult to access. Non-conventional oil supplies (e.g. oil sands in Canada, heavy oil in Venezuela, and oil shale in the United States), while abundant, are subject to potentially constraining challenges of their own. Thus our capability to replace existing oil supplies and expand capacity in order to meet future growth will depend largely on the investment choices and actions of a small number of major producers, all of whom have agendas, priorities, and internal needs that may not always align with those of major consuming nations.
As global demand continues to grow, investment cycles, technologies, and supporting infrastructure will be critical. However, our inability to anticipate fundamental movements in supply and demand, as evidenced by the last two years, continues to result in price volatility that hampers our ability to make long-term strategic investments to deliver the appropriate mix of fuels and technologies.
Those examples illustrate the continuing importance of energy security issues. However, this is no longer the only challenge. The world has changed considerably since 1973. In order to be effective in this new landscape the IEA must be prepared to evolve with it, aligning strategies and priorities to reflect these new realities. Deeply connected to the energy system and the existing mandate of the IEA, today we face new challenges of imposing magnitude: global climate change and a changing geopolitical landscape.
Just as we failed to foresee the security consequences of altered oil market fundamentals leading up to the energy crisis of 1973-1974, we failed for many years to appreciate the environmental consequences of intensive fossil fuel use that have now led us to the brink of a climate crisis. This complex problem is not only a moral dilemma, but one of imminent significance for governance, international security, and the global economy.
A continuation on our current path risks catastrophic impacts across many parts of the globe (including in currently producing areas) manifest in coastal flooding, drought, crop decline, and species extinctions. With little difficulty we can envision these leading to more human-oriented problems — hunger, disease, population displacement, and conflict — problems that could grow unmanageable from governance and international security perspectives.
Climate change also promises to impact the global economy. It will require us to fundamentally alter the profile of our energy use and derive growth from fuels and technologies that emit less carbon dioxide into the atmosphere, and to adapt to the climatic changes that our actions are too late to prevent. We must recognize that developing nations view mitigating climate change as a threat to their aspirations for continued economic growth. This, however, is a false choice. For without meaningful action to reduce global emissions, the impacts of climate change will certainly inhibit economic growth.
To effectively deal with climate change requires an overarching framework and a set of tools that that are not yet fully developed. We need clear goals and timelines, as well as analysis of true costs and benefits — difficult tasks compounded by the degrees of uncertainty that persist. We must continue to advance our understanding of climate science. We must develop energy policies that facilitate and coincide with climate objectives. And we must rapidly develop and deploy a full suite of low-carbon and energy efficient technologies — and this includes an expansion of nuclear energy.
Existing energy security concerns, coupled with the prospect of global climate change, portend an unsustainable future that we must strive to avoid at all costs. The daunting but necessary task before us then requires nothing less than a transformation of our current energy system to one that is at once more secure, flexible, adaptive, and environmentally benign.
In doing so, however, we must be thoughtful and creative in implementing policies that balance the goals of security, economic growth, and environmental stewardship. Though nations may emphasize these broad goals differently, they are most assuredly ones that we can all share and embrace.
We must approach these challenges with some urgency, but we must also understand that the transformation cannot occur overnight. Remaking the energy system will take decades. Therefore, managing the transition is key. We should seize immediate opportunities to support technology, research, efficiency, and low-carbon fuels while simultaneously ensuring that the current energy system remains robust.
As we begin that transformation, the IEA and other multinational institutions must evolve in ways that allow them to more accurately reflect changing global realities. In the past 35 years the world has undergone notable geopolitical shifts: we have a more unified Europe; we have witnessed the collapse of the Soviet Union, and the emergence of new nations. We have seen how persistently high energy prices have impacted all global economies and how major energy exporters have attempted to leverage their resource wealth to assert geopolitical influence. And we all recognize how China and India have emerged as major market actors.
Chinese oil consumption in 1973 was inconsequential. China is now the second largest consumer and importer of oil. Its total energy consumption today is exceeded only by the United States. China, together with India, is projected to account for half of the energy demand growth that will occur between now and 2030.
As I noted earlier, that nations outside of the OECD (and the IEA) now account for the majority of global energy consumption is a change of great significance. Increased access to and use of energy should of course be viewed as a positive development enabling nations and their peoples to achieve greater prosperity, but the fact that this bloc of rising major consumers resides outside of the cooperative framework of the IEA compromises the organization’s ability to effectively address global energy security and climate concerns and concurrently deprives these nations of the full benefits of IEA membership.
A Vision for the IEA
Given its core roles of fostering international cooperation and assisting governments in shaping better energy policies, energy security and climate change are challenges the IEA is particularly well suited to address.
I am fond of noting that even the best consultative machinery cannot substitute for common vision and shared goals. Herein lies at least part of the dilemma faced by the agency as it confronts a changing global landscape. One of the strengths of the IEA is that its members are bound by common interests and similar values and goals. Expanding the circle to an equivalent of the G20 on energy issues would bring broader representation and a more complete segment of the consumer market, but also could challenge the institution’s fundamental structure. Without more fully integrating additional countries that will have an increasingly important role in shaping the global energy system of the future, the IEA risks becoming outdated, irrelevant, and unable to effectively accomplish even its historical objectives.
Notice that I said countries shaping the global energy system of the future, rather than just consumers. The IEA has never been solely a consumers club. If we consign it to such a future, it will be less able to accomplish its core objectives. In addition to the rising consumers, the IEA must also engage global energy producers, who most assuredly also share a stake in secure and stable energy markets. Participation in a regular dialogue that includes key consumers and producers, through existing channels or new ones, may provide valuable opportunities to address our common issues.
So where does that leave us? It seems to me that there are a few key questions that you, the member countries, most assuredly must address.
First, given the critical connections between energy and environmental issues, how should the IEA integrate climate change within its priorities and assist governments in their efforts to transform of the energy system?
Clearly there is a continued and necessary role for the IEA to pursue those activities directed toward improving our collective energy security. Within its role of helping governments to formulate better energy policy, the IEA can also be a highly effective organization on the climate change front.
Where there is a decided convergence of interests as in the case of promoting energy efficiency and conservation, research, the development and deployment of alternative low carbon energy forms, or the sharing of energy technologies — these should be vigorously pursued. Where trade offs exist between advancing indigenous but higher carbon energy forms on the grounds of security improvement, but to the detriment of the environment, the IEA’s policy and analytical work should prove instructive and helpful to all nations — producer as well as consumers, members and non-members alike. But new mechanisms may have to be developed to allow this to happen.
Second, and I alluded to this earlier, how can the IEA as an institution engage and better integrate non-member nations that nonetheless will play key roles in shaping our collective energy system going forward?
In its current configuration, the IEA is an effective club of like-minded nations whose membership no longer reflects the majority of global energy consumption. Nor does the institution include some of the world’s largest CO2 emitters. The success that the IEA has historically achieved has come through the collaborative structure developed among its members. This framework will lose its effectiveness and importance if the IEA represents only a minority and diminishing portion of the world’s consumers. As energy markets become increasingly dominated by the developing world, the ability of the IEA to influence our collective security — even for just the current membership — and to address the energy aspects of climate change will be profoundly diminished.
The IEA must evolve to incorporate those countries that will drive the future of global energy. While expanding an organization may be disruptive to the status-quo, we must be willing to adapt to changing realities. All member countries will need to carefully contemplate the principles upon which the IEA was founded and ask themselves how it might be made to include a new, broader set of key energy players.
In turn, emerging consumers like China and India must be willing to accept their reciprocal responsibilities as world powers and major market actors. They should recognize that they too would be well-served by IEA activities. Data collection, technology, efficiency, renewables, cooperative research and stock building provide just a few of the many viable avenues for collaboration that would benefit our common objectives.
In closing, let me end with a cautionary note. We must remember that the IEA has succeeded because of the common interests and the common principles that bind its members together. As we contemplate expanding the organization, that characteristic must be preserved. Faced with these challenges, we cannot confuse optics and rhetoric for a strategy. Lofty inspirational goals are no substitute for effective solutions. Thank you.