IEEJ：August 2017○ｃIEEJ 2017
Special Bulletin
A Japanese Perspective on the International Energy Landscape (337)

August 18, 2017

An Analysis on Global Energy Governance
Ken Koyama, PhD
Chief Economist, Managing Director
The Institute of Energy Economics, Japan
In the world of international politics, the international situation usually continues tochange as various challenges and problems arise. Recently, however, the U.S. Trump administration
has apparently made the international situation more fluid and uncertain. It is not strange for us toget concerned that powers or mechanisms to bring about global order or stability have declined orfailed to work.
The presence of powers and mechanisms to bring about global order or stability, therealization of global order and stability through their functions and the working of these functions
may be called “global governance”. Governance means the act or state of controlling/governing. As
control and governance for order and stability are desirable for the world from the viewpoint of
global interests, mechanisms to realize such control and governance have always been pursued.
In the world of energy as well, control and governance have been pursued from the same
viewpoint in various phases. The term “global energy governance” may be interpreted as
representing powers and mechanisms to control and govern the stability and sustainability of global
energy system. More specifically, global energy governance may include mechanisms to (1) protect
international energy security, (2) protect international energy market order and (3) address climatechange and other energy-related global environmental problems. The three mechanisms are designed
to conserve global interests related to energy. As indicated by the word “governance,” some power
must be given to the leader of the control and governance mechanisms. In the following, I would liketo analyze the first and second of the three mechanisms under a space constraint:
A review of the mechanism to protect or influence international energy security provides
interesting historical changes. The most impressive and significant are changes in the mechanism forthe international market for oil, which is the largest traded commodity, accounts for dominant sharein total energy supply and has been involved in significant energy security problems. Beforebecoming a net oil importer in the 1960s, the United States had undertaken governance as theadjustor of global oil supply. The United States had been the last resort of oil supply, providing
additional oil supply to allies in wartime, for example. After becoming a net oil importer, however,the United States no longer played a role as the adjustor of global oil supply by using domestically
produced oil. Then, the Middle East and the Organization of the Petroleum Exporting Countries
replaced the United States as the adjustor. In the 1970s including two oil crises, OPEC powers forinfluencing global order by production adjustment peaked.

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Then, oil consuming countries formed the International Energy Agency to represent theirpowers and counter OPEC powers. The IEA urged its member countries to stockpile oil anddiversify energy sources and developed a mechanism to stabilize the international oil market byreleasing oil reserves in emergency. Since its foundation, the IEA has so far worked as one of theglobal energy governance centers.
As is well known, then U.S. State Secretary Henry Kissinger played a key role in founding
the IEA. Through the IEA, the United States, even after becoming a net oil importer, has remained at
the center of global energy governance as a superpower engaging closely in security of the Middle
East and the protector of sea lanes for oil transportation. The first factor to change this situation is
the shale revolution. The United States has rapidly lowered its dependence on oil imports by
expanding shale oil production and shifted from an oil-short country to an oil-abundant country.
Attracting attention now is whether the shift would give the United States more powers or influence
incentives or motivations for control and governance. The second factor to change the situation is therise of China. As China continues to expand oil imports and increase its presence in the internationaloil market, what role it would play in global energy governance is attracting global attention. China’s
One Belt, One Road plan could exert some influences on global energy governance. Future Chinese
movements in this regard are attracting much attention.
Regarding the second mechanism to protect international energy market order, interestinghistorical changes have also been seen. The mechanism can be analyzed from the viewpoint of thehistory of control on surplus oil production capacity. The international oil market has always had
surplus oil production capacity over meeting global oil demand. If the surplus capacity fails to becontrolled adequately, crude oil prices lose stability and plunge. Such plunges have been repeatedhistorically. Crude oil prices’ destabilization and plunge are significant problems for international
politics, the global economy and the oil industry. Therefore, the need has been recognized for amechanism to control and govern the surplus capacity.
Famous specific mechanisms to protect international oil market order include Standard
Oil’s market control maintained until the beginning of the 20th century, the 1928 Achnacarryagreement for market adjustment among international oil majors, production adjustment by theTexas Railroad Commission leading to the OPEC founding scheme, international oil majors’ joint
control on Middle Eastern oil bringing about oil market stability through the 1960s, OPEC’s
country-by-country production adjustment since the first half of the 1980s and Saudi Arabia’s role asa swing producer contributing to crude oil price stability in the first half of the 1980s.
The latest crude oil price plunge came as OPEC and its leader Saudi Arabia surprizeddominant market expectations by vowing to leave the market to price crude oil (to make noproduction adjustment) under a loose supply-demand relationship in the second half of 2014. Crude
oil prices rallied after Saudi Arabia took leadership in achieving a coordinated production cut
agreement among OPEC and non-OPEC oil producing countries in the second half of 2017,indicating that control on surplus production capacity still exerts great influences on oil market
order.

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Surplus capacity control is indispensable for maintaining market stability and order.
However, surplus capacity control produces a cost for keeping some operational production capacity
unused. The leader of the surplus capacity control must bear most of the cost. Some cost is required
for maintaining global energy governance. Instead, however, the leader of the governance is given
powers to influence the market while being required to bear the cost.

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