IEEJ：March 2017ｃ IEEJ 2017
○Special Bulletin
A Japanese Perspective on the International Energy Landscape (317)

March 31, 2017Market Mechanism and Energy Security
Ken Koyama, PhD
Chief Economist, Managing Director
The Institute of Energy Economics, JapanOn March 28 through 30, I had an opportunity to discuss energy issues with Australian
government officials and experts in Melbourne, focusing on how Australia is facing the energy
security issue and what Australia should do to address its energy security challenge.
Australia is one of the world’s leading net energy exporters, boasting very rich energyresources and exporting coal, gas (liquefied natural gas) and uranium for nuclear power generation.
Why does such a large energy exporter have great interests in energy security? One reason is thatstable supply of energy as an indispensable good is a key challenge for energy-using economic
operations and energy users or consumers living normal lives even in a net energy exporting country.
This point attracts attention at a time when some resource-rich countries are failing tocover domestic energy demand and turning into energy importers for various reasons. For example, aMiddle Eastern country rich with natural gas resources has chosen to import LNG instead ofdeveloping domestic gas resources to cover a supply-demand imbalance attributable to too cheap
domestic gas prices. Malaysia, known as a large LNG exporter, has begun to import LNG. Even inAustralia, a leading LNG exporter rich with gas resources, an LNG export project in Queensland has
affected domestic gas supply, leading to concern that a domestic gas price hike problem may growmore serious unless domestic gas supply is expanded. Irrespective of resources, any problem with oil,gas or electricity supply chains or infrastructure could become a threat to stable domestic energy
supply. In this sense, it is not strange that energy security issues are attracting attentions even inresource-rich Australia.
In fact, however, another important point is that Australia is a net oil importer and isgrowing more dependent on oil imports. Australia’s rate of dependence on oil imports rose from 4%
in 2000 to 62% in 2015. While its dependence on the Middle East for crude oil imports is not sogreat, Australia depends heavily on petroleum product imports from South Korea, Singapore andother Asian countries that import crude oil primarily from the Middle East. Given such “indirectdependence” on the Middle East, Australia’s overall dependence on the Middle East is notnecessarily ignorable. Furthermore, Australia, a net oil importer and a member of the International
Energy Agency, has yet to meet the IEA requirement to keep oil reserves equivalent to 90 days of net
oil imports. In a sense, it may be sound for Australian policy planners to be conscious of energy
security in such situation.
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IEEJ：March 2017ｃ IEEJ 2017
○An interesting point to me in the discussions in Melbourne was that Australian government
officials and experts indicated a stance that energy security, though being very important, should or
can be left basically to market principles. This may mean that a fully functioning market may resolve
energy security problems. Based on the stance, the government should refrain from intervening in
the market even if energy prices spike due to some supply disruption. The basic philosophy may bethat high prices can hold down demand and expand supply to bring about lower prices.
As for the concept of diversity to which many energy security experts give top priority, theAustralian side interestingly indicated that diverse market participants including new entrants exist
in a fully functioning market and act diversely to make diverse options available. Australia, as wellas the United States and the United Kingdom, has a strong affinity for market principles and adopts
an energy security policy based on the philosophy.
However, energy security (like environmental problems including climate change) is
essentially the issue of how to address “externalities”. We may not be able to expect that market
principles alone can resolve energy security problems. I think that policies or governments havegreat roles to play in addressing energy security. Market principles basically represent a world ofwinners and losers in which losers have no choice but to leave the market. In such world, the mostefficient options (within a period of time to be determined by the market) could be frequently
selected to cause concentration. This factor might have been behind the fact that Japan’s rate ofdependence on oil for energy supply exceeded 70% in the first half of the 1970s. Also reflecting thefactor is the fact that many coal power plant construction projects have been planned amid theelectricity system reform in Japan. As for market competition, a great number of new entrants in themarket may initially diversify the market before market players decline amid competition to lead asmaller number of players to occupy the market, as seen sporadically in the world.
Market principles and competition basically represent a process in whichsurpluses areefficiently eliminated from a system. As a result, surplus capacity may be reduced with inventories
being optimized (minimized), leading to a cautious stance on uncertain long-term investment. Thismay be a desirable streamlining process. However, a buffer redundancy to deal with unpredictablefluctuations in the market could be lost, leading to the market’s destabilization. It may be needless to
say that it is very important to effectively take advantage of market principles and have a fully
functioning market in the energy world. However, how to address externalities including energy
security is an old, new and important issue in the energy world. The discussions on energy security
in Australia gave me an opportunity to reconsider the above critical, complex and current issue.

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