IEEJ：May 2018○ｃIEEJ 2018
Special Bulletin
A Japanese Perspective on the International Energy Landscape (376)

May 25, 2018

Emerging Challenges for Oil, Gas and Electricity Supply Security
under the New Energy Market Situation
Ken Koyama, PhD
Chief Economist, Managing Director
The Institute of Energy Economics, Japan
Energy security, defined as securing the necessary and sufficient quantity of energy forcivilian life, economic activities and national management at reasonable prices in a stable manner, isa vitally significant challenge for any country or human beings. The history of the internationalenergy market indicates that energy security looms as a particularly important policy challenge whena country becomes a net energy importer, faces rising energy import dependence and sees a sharpenergy price hike triggered by some factors. Behind sharp energy price hikes have been various risk
factors including contingent risks such as war, revolution and accident, and structural risks such as
investment shortages, market dominance and excessive concentration in or dependence on some
supply sources, regions or suppliers. In this sense, we can conclude that a risk or problem identified
as the most serious or important at any given age or time has become an energy security challenge in
the international energy market.
The greatest matter of concern regarding energy security has traditionally been linked tooil supply security. This is because (1) oil accounts for the largest share of primary energy supply,(2) oil is the largest energy good for international trade that exerts great influence on the world
economy and international politics through trade and price fluctuations and causes great changes inthe balance of power between oil producing and consuming countries, and (3) numerous grave oil
supply security incidents have actually shaken up the world, as symbolized by the two oil crises in
the 1970s.
Even at present, oil supply security is a new important challenge attracting attention fromenergy stakeholders. An oil price slump from the second half of 2014 had lasted far longer thanexpected, leaving the international oil market in oversupply. This year, however, crude oil prices
have risen back above $70 per barrel. As a matter of course, rebalancing has been behind the oil
price rebound. In addition, growing geopolitical risks in the Middle East, the center of global oil
supply, have contributed much to the price hike. Problems identified as the most important recently
are an expected possibility of reduction in Iranian crude oil exports after the United States’ offer towithdraw from the Iran nuclear deal and regional turmoil involving Iran that could become apotential risk for oil supply from the Middle East. There has not been any incident in which recent
geopolitical risks in the Middle East pose a direct threat to oil supply from the region. As indicatedby a report released by the Institute of Energy Economics, Japan in October 2016, however, anylarge-scale oil supply interruption in the Middle East could exert a great impact on the world. In thissense, oil supply challenges mainly in the Middle East under a new situation remain extremely
important even at present.
However, not only oil supply security is attracting global attention. In a symbolic
development, the International Energy Agency, which was created in response to the 1973 oil crisisand designed to enhance oil supply security, is about to address gas and electricity supply security in1

IEEJ：May 2018○ｃIEEJ 2018
addition to oil supply security. The IEA is planning to reorganize or rebuild energy security amidchanges in the international energy situation.
Interest in gas supply security has grown due to fundamental factors including gas’s rising
share and significance in primary energy supply and expanded international gas trade throughpipelines and liquefied natural gas. Internationally, however, Russia’s suspension of pipeline gas
supply through Ukraine in 2009 highlighted the significance of gas supply security particularly at theEuropean policy level. In the past few years, however, few people have apparently identified any
urgent gas supply security risk in the international gas and LNG market supported by oversupply orabundant supply. Rather, how to secure, decide and implement investment to meet future gas
demand expansion is seen as the most important challenge for stabilizing gas supply and demandand sound development of the gas market.
However, the Russian gas problem is still seen as one of major gas supply securitychallenges mainly in Europe. In this context, the diversification of gas supply sources and methods isa central measure to enhance gas supply security. Discussions on Nord Stream 2 and other projects todiversify international gas pipeline routes in Europe have always been sandwiched between theconsciousness of the need for the diversification and the economic efficiency or feasibility ofdiversification projects. The current gas supply security issue features the utilization of LNG as amore flexible gas supply sources, the improvement of LNG market liquidity and the developmentand enhancement of LNG market functions that are viewed as important for strengthening gas
supply security.
Electricity supply security has become an important energy security challenge for thepresent and future in a sense. This is because the stable supply of electricity as a final consumption
good is growing more important at a time when the electrification of energy demand has made and isexpected to make progress in the world. Any disruption to stable electricity supply may inevitably
and greatly affect civilian life, economic activities and national management.
Present international discussions on the important electricity supply security indicate some
important issues that should attract attention. One issue is potential vulnerability arising fromexcessive dependence on some electricity sources. In the United States where gas has become thelargest electricity source thanks to the shale revolution, for example, extraordinary winter cold
waves’ impact on gas supply could spill over to electricity supply. Intermittent renewable energy
sources’ growing share of power generation has also been recognized as an important challenge forstable electricity supply. Countermeasures including those to absorb such intermittency have grown
more important.
As electricity market liberalization promoted mainly in developed countries has caused
constraints on necessary and sufficient electricity investment, new challenges such as theintroduction of a capacity mechanism or capacity market are seen in numerous countries or regions,indicating a new challenge for stable electricity supply. This problem is coupled with the expansionof intermittent renewable energy electricity sources to exert complicated effects. Electricity market
stakeholders also pay attention to the possibility that extraordinary weather conditions, large-scale
natural disasters, terrorism including cyberattacks and other unique events could become serious risk
factors. How to enhance the resilience of electricity supply capacity under the new market situation
has become an important challenge. As far as energy security remains critically important, how toensure supply security in oil, gas and electricity markets under a new situation will continue to be themost important energy policy challenge.
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