Australian foreign policy has often overlooked energy. Yet the global energy system is failing to keep up with the rapid transformations taking place in energy markets. This poses significant risks to Australia’s interests.
The Foreign Policy White Paper process presents a timely opportunity for Australia, a global energy superpower, to reconsider its role in shaping the rules that govern energy.
Transformations in global energy markets
The global energy sector is experiencing a transformation wrought by two historically significant trends. The first is the shift in the sources of global production and consumption. Nations that were major energy importers only a few years ago are becoming exporters, exporters are becoming large consumers, and previously small consumers are now the prime source of global demand for oil and gas.
China is now the world’s largest energy consumer and is set to become the largest oil importing country and the US, once the largest energy consumer and dependent on Middle Eastern oil, could be on track for energy self-sufficiency with the revolution in unconventional oil and gas supplies. In other words, the global energy sector is no longer dominated by a small band of OECD countries on both sides of the Atlantic Ocean.
Second however, these changes are also taking place in a carbon-constrained world. Yet energy-related CO2 emissions continue to rise, and according to IEA projections, will increase by 20% to 2035, even when the impact of existing measures to combat climate change are taken into account.
A global energy governance gap
The international energy architecture has not kept pace with these rapid transformations, and there is now a consensus among scholars and policymakers that the current international energy system is a mess with many actors, many priorities, little coherence, and limited effectiveness.
In other policy domains states have created a leading international institution, such as WTO for trade, the WHO for health and the IMF for finance. However, there is no single institution for energy.
The dominant existing institution is the IEA, established in 1974 by the world’s largest oil consumers - including the US, the UK and Japan - as a counterbalance to the world’s largest oil producers (represented by OPEC) following the oil shocks of the 1970s. In recent decades it has broadened its focus to include not only oil markets, but gas markets, energy efficiency and climate change issues. It has also expanded its membership from the original 17 to 29 member countries, almost all of the OECD membership.
Yet because Brazil, Russia, India and China are not members of the OECD - one of the key requirements for formal membership of the IEA, along with a requirement to hold strategic oil stocks equivalent to 90 days’ worth of imports - they remain outside the IEA.
Aside from the IEA, the existing international energy architecture includes a series of energy organisations that overlap, often with conflicting agendas. These include OPEC, which was created in 1960, and began interacting with the IEA only after the first Gulf War in 1991; the International Energy Forum (IEF), which was created in 1991 as a dialogue between oil-consuming countries and OPEC members; the Energy Charter Treaty organization (ECT), established in the same year to promote energy sector investment in eastern Europe following the end of the Cold War; and, most recently, the International Renewable Energy Agency (IRENA), which was established in 2011 largely as a result of German leadership to advance renewable energy.
While these organisations have more inclusive memberships than the IEA - the IEF, for example, includes Brazil, Russia, India and China, among its members - their influence on international energy markets and resources is very limited in comparison.
At the G20 Summit in 2014 world leaders agreed for the first time that the existing international energy architecture is out of date and needs to be reformed. Australia should play a lead role in driving these discussions to ensure concrete outcomes are achieved.
A case in point is reform of the IEA. The G20 agreement in 2014 recognised that the IEA needs to be reformed. If reform is to go close to matching the changes taking place in energy markets, then the IEA treaty needs to be amended to allow large energy consumers, such as Brazil, Russia, India and China, to become full members.
This should be done immediately. It would not only improve the IEA’s representativeness, but it would enhance cooperation between developed and emerging economies on energy.
However, substantive reform that leads to reliable, affordable and clean energy will require more. Australia should push the G20 to embrace the role of a global steering committee. That is, a body that can produce global public goods by using its power to set the international agenda, agree on global norms and steer existing multilateral institutions, or even create new ones.
In this role the G20 could consider whether a new world energy organisation is required, or perhaps more likely, whether the mandate of the IEA should be reorientated from a focus on global oil markets to a focus on achieving a clean energy revolution.
The politics of such changes will not be easy, but as an energy superpower and member of the G20, Australia is well placed to steer such discussions.