Price Forecasts for Oil
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“TECHNOLOGY FORECASTING - CRISIS ANALYSIS”
Technology Futures & Business Strategy 1st Assessment Project
Michel Godet indicated that qualitative parameters were important in accurate forecasting. Using the available information in the international literature and between 1000 and 1500 words:
1. Mention the qualitative parameters that may be considered in future energy price scenarios. For this purpose take the year 2020 and list, with a brief explanation, the parameters you consider should be included.
2. Which of these parameters can you reasonably quantify? (Attempt to identify at least five parameters)
3. Do you agree with this specific aspect of Godet's proposition? Why or why not?
4. Evaluate a crisis impact of the accuracy of technology forecasting. Identify the parameters characterizing the crisis aspects. Accordingly, present your opinion about the validity of the forecasts.
5. Using the installed nuclear power data between 1967 and 1987 estimate (using extrapolation techniques) the expected nuclear power time evolution between 1987 and 2007. Comment on the accuracy of your forecasts in relation with the real data. Can you mention any lead time between the major accident of Chernobyl and the reaction of the international electrical power market?
The OPEC oil price rise in 1973 had an important effect on energy use and energy efficiency, although much of the impact was short-lived. In 2003-4 the oil price effectively doubled, reaching $50/barrel for a period and lately it has reached over $90/barrel. A major player now is Gazprom in Russia News has broken that Gazprom will cut supplies of natural gas to Europe unless it is allowed to raise prices by 200% for export customers, (Customers in Russia historically pay much lower prices). Using the available information in the international literature and between 2000 and 2500 words:
6. Describe your measured response to this, as either an energy Supplier or major energy user.
7. Would you say that your response was based upon “out of the box” solutions, or a more conservative, incremental approach?
8. Discuss the relative merits and limitations of each of these possible responses, identifying what you believe the two approaches mean.
9. How this crisis shall influence the future of European economies? How could these effects been mitigated? Make your own forecasts.
Your answers to 6-8 above are based upon assumed positions within organisations which may employ many people. The next part of this question relates to the impact rising energy prices and, perhaps more importantly, the effect of climate change, may have on your own style of living.
10. At a personal/domestic level, can you foresee a situation in which we may consider that for the benefit of all, we may need to make do with less, in terms of capital goods, travel, and perceived acceptable levels of comfort?
Technology Futures & Business Strategy 1st Assessment Project
Based on the Prospective approach and the scenarios method (Godet, 1982), Michel Godet noted the limitations of the classical forecasting concerned with quantification and models (see also Appendix, Table Ap.I). According to Godet, models that only consider quantified parameters do not take into account the development of new relationships and the possible changes in trends. The impossibility of forecasting the future as a function solely of past data is directly related to the omission of qualitative and non-quantifiable parameters such as the wishes and behaviour of relevant actors (Godet, 1982). Furthermore, to structure future scenarios, the variables related to the phenomenon under investigation and the variables configuring its environment should be recognized and analyzed in detail. Besides, the interrelationship among variables, the relative power and fundamental actors, their strategies and available resources as well as the objectives and constraints that must be overcome, should also be taken into account.
By granting energy as a commodity under the view of conventional economic theories, markets and price mechanisms are used in order to allocate the respective resources. More specifically, it is the interaction of demand and supply in the markets that allocates resources and largely shapes prices, and it is the broader ecosystem boundaries that these market interactions take place in. Energy pricing, with energy being perceived either as an input or as a potentially polluting source of our ecosystem, clearly stands upon both the sub disciplines of resource and environmental economics (Sweeney, 2004), also depending on the social, political and technological status of the time being and the time to come until 2020. In this context, one may acknowledge a bundle of parameters that may be considered for configuring the respective future energy price scenarios. What is important to note is that similar to the beliefs of Godet, the parameters involved should be studied in terms of interrelationship, while qualitative and non quantified parameters should be taken into account as well.
As already mentioned, the configuration of prices within a market -the energy market currently discussed- is largely dependent on the supply and demand balance. This is measured by the respective supply and demand tension expressing the status of a commodity in market terms and providing indications concerning potential energy price changes. While high tensions imply prices' imbalance, the opposite is valid for low tension rates. Hence, in order to evaluate future energy prices on the basis of parameters, one should identify the parameters that influence the supply-demand balance in every of the fields previously acknowledged (i.e. social, political, environmental, economical and technological). In this context, in 1.1 the most influential of the parameters configuring energy prices may be encountered.
Energy markets are largely influenced by the economic growth factors expressed on the basis of Gross Domestic Product (GDP), inflation, interest and unemployment rates. Given the economic growth along with the parameter of demographics (regarding both the population increase and migrations) one may picture the corresponding trend in energy consumption (i.e. the demand side). Following, policy decisions concerning the determination of fuel mix are determinative as far as energy pricing is considered. For instance, fossil fuels continuing to dominate will stimulate stricter pollution prevention legislation measures (e.g. taxation) and policies for tackling climate change and global warming that will raise energy prices.
In parallel, the reinforcement of the respective market holders, potentially leading to strong monopolies, should also be expected. Turning to renewable energy sources may on the one hand -for some of the technologies- imply an adjustment period in order for the corresponding markets to balance and on the other entail significant environmental benefits, in monetary terms as well. Global warming and climate change effects being evident supports the implementation of mitigation measures towards the reduction of greenhouse gas (GHG) emissions, this holding a key role in respect of the future.
Reserves holding a key role in the future configuration of energy prices not only in terms of scarcity, but also in terms of production costs is directly related with the technological development concerning the exploitation of new deposits and the promotion of substitutes. As already implied, the power of existing markets is another key factor while the efficiency and absorption of energy investments -the investment shares and outcomes of research and development efforts should be underlined- must be also taken into account. The factors concerned with the quality of life suggest an additional parameter that may affect energy consumption patterns and one that cannot be easily captured despite of the indices recommended so far (Allen, 1991).
Moreover, as properly put in the Annual Energy Outlook of 2007 (EIA, 2007a), energy markets projections are subject to much uncertainty (unanticipated events). Many of the events that shape energy markets and therefore the price of energy as well cannot be foreseen. These include unexpected weather events and natural disasters (Rezek and Blair, 2008), major innovations and technological breakthroughs (Marbán and Valdés-Solís, 2007; Varandas, 2008), disruptions and whirls in the political level (Stern, 2006) with analogous societal consequences, the outbreak of a war (Tahmassebi, 1986; Fernandez, 2008) or a nuclear accident, all of them either smouldering or implying blind spots that cannot be directly projected and consequently quantified. Besides, another area of uncertainty is concerned with the fact that even the established trends' steady evolution cannot be guaranteed.
Summarizing, a brief explanation was presently given on how each of the parameters acknowledged may influence energy pricing. Additionally, an effort was also carried out in order to give a short description of the interrelationship among parameters, this supporting one of Godet's arguments. Insisting on the interrelationship of variables, several of the parameters previously encountered should be diffused to every major regional energy market, the latter being largely influenced by the relationship between fuel types and energy sectors (see also 1.2).
Eventually, one may result in a rather complex system that encounters the evolution of influential parameters inside the balance between energy types and energy sectors, this revealing the crucial role of energy fuel mix previously discussed. Following, an effort is carried out in order to reasonably quantify some of the parameters acknowledged.
Given the bundle of parameters that are thought to influence future energy pricing, a certain number of them can be quantified. For instance, the parameters of population, economic growth, energy consumption, greenhouse gas emissions, energy reserves, and energy fuel mix can be expressed in numerical terms.
Demographic growth examines how regional and global demography changes over time. According to the United Nations projections (UN, 2006), world population will increase by over 1 billion people in the years to come until 2020, this suggesting an annual increase rate of 1.1%. While in some areas there is a negative population growth to be considered (e.g. European countries), the opposite may be encountered for some of the Asian countries (e.g. India) where overpopulation is met (see for example 2.1 with EIA forecasts). Besides, the migration of people comprises an additional factor influencing energy patterns via the imposition of unequal population distribution already encountered due to birth and mortality rates.
Based on the energy consumption trends ( 2.2), it is expected that energy demand related to all energy products will increase in the years to come, even in such levels that supply may not be able to adequately respond (Asif and Muneer, 2007). In fact, the annual world energy consumption growth is approximately 2% with projections supporting future average rates of 1.1% per annum (EIA, 2007b). In fact, by considering the two of parameters so far examined one may result in the most substantial energy per cap index, clearly establishing the differentiation in energy consumption patterns among world regions (see also question 10).
Furthermore, according to the WEO claims (WEC, 2007) that energy generated from fossil fuels will remain the main energy source (expected to cover almost 83% of global energy demand in 2030) and given the 2020 time horizon, much depends on the appearing constraints of world energy reserves, especially those regarding oil and natural gas. While certain studies sound relieving (WCI, 2007), others questioning the extent of increase in the production outputs ring the alarm of forthcoming peaks within the next one or two decades (Bentley, 2002).
If the latter is valid, the corresponding demand will not be met, prices will rise, inflation, and international tension will become very likely to occur, and inevitably energy users will have to ration (Wirl, 2008). Overall, what the combination of energy mix with energy reserves provides is the measuring of security of supply, the latter configuring the supply and demand tensions, largely shaping energy prices. Besides, targets set in respect of renewable energy sources further penetration also provide a quantification view; e.g. the EWEA target for 22% coverage of the European electricity consumption by 2030 (EWEA, 2006).
Next, expressing economic growth on the basis of gross domestic product (GDP) suggests a constant increase of the former within the range of an average 3% to 4% per year (IMF, 2004), noted during the period from 1970 to 2003. Again, inequity that is to be considered among different world regions is directly related with the previous parameters, illustrating the energy requirements' variation. A characteristic example considers China demonstrating an average annual percent change of GDP 2.4% greater than the world average. In 2.3, the respective trends of GDP growth up to the year 2020 may be obtained.
Finally, the environmental impact of energy use being expressed on the basis of GHG emissions not only considers the fuel mix and energy consumption but also takes into account the technology used for energy generation. Taking CO2, an increase of 17Gt in a 34 years period, i.e. from 1970 to 2004 (IPCC, 2007), indicates the strong increasing trend, also presented in 2.4. Given also some of the commitments adopted in order to mitigate the greenhouse effect however (e.g. the Kyoto protocol), further quantification, not relying solely on past trends, is possible. The stimulation of additional mitigation measures until 2020 is rather likely, this both imposing the need for shifting to non-fossil fuels and developing cleaner energy generation technologies.
Considering the various parameters' trends illustrated above, one may sense that the tensions between supply and demand, this comprising the main driver for energy prices, are going to rise. Energy consumption, GDP and population rates on one hand demonstrate the demand side, while declining reserves and mitigation measures describe the opposite supply side. In between, the decisions for future energy fuel mix patterns, although able to completely reverse the energy market's status quo, are not thought to radically vary within the next 10 to 15 years. Hence, unless some major changes occur, the rising tensions between supply and demand imply both instability and increase of prices on a global level with strong differentiation to be encountered among different world regions. As far as the degree of energy price variation is concerned, the implementation of forecasting may both incorporate all of the pre-mentioned parameters and provide various scenarios considering each one's expected future time evolution.
As previously seen, several parameters were acknowledged in order to form future energy price scenarios. While some of them were possible to quantify, others although not quantified were equally important inputs to keep in mind. Apart from the given inaccuracy of data (either high or low levelled) coupled with unstable models and the pertinacity of explaining the future in terms of the past, Godet emphasizes on the lack of a global and qualitative approach concerned with forecasting (Godet, 1982). Although quantitative methods may prove to be reliable enough and reasonably accurate for short term forecasts, the same is not valid for forecasts concerned with longer periods. The greater the distance from the reference point, the more obvious is the inability of quantitative data to provide valid forecasts (see also 3.1).
In this context, it is critical to comment on the relativity of time scales noted among the study of various phenomena. Hence, what may seem short termed for one phenomenon studied may actually comprise a long period forecast for another that appears to be rapidly changing over time. Any case given, the chances of significant changes regarding the environment in which the phenomenon under study develops are considerably higher as the time horizon becomes longer and it would be more or less naïve to solely depend on forecasting methods like the extrapolation of trends.
Furthermore, the complexity of phenomena studied and the interdependence among the influencing parameters calls for the inclusion of both quantitative and qualitative parameters with Godet clearly addressing the complementarity between the prospective and classical forecasting (Godet, 1982). It was in fact during the first section of this part that the analysis of energy pricing configuration revealed the importance of interaction between quantitative and qualitative parameters. Energy price could not be disengaged from the parallel evolvement of parameters that even though not easily quantified, do structure the phenomenon environment (e.g. political, technological, economic, social, legal and other aspects). What must be outlined here is that similar to the scaling of decision making (strategic-long term, innovative-medium term, operational-short term), the role of quantitative data is gradually fading out as we tend to conceptualize the entire phenomenon environment. Hence the broader the view, again the more obvious is the inability of quantitative data to support a reliable forecasting (see also 2.1).
Although in its extreme point of view, Godet's proposition perfectly fits the ability of diagnosing forthcoming crises. Already extremely difficult to predict a crisis, omitting parameters such as the wishes of relevant actors and other influential factors that cannot be quantified makes it impossible even to sense it. It is in this context that one should not disregard the importance of other forecasting resources -apart from data- including assumptions, insight and judgment, all of them involving the subjectivity factor. If managing to get over the reef of the NIH syndrome, creativity and broad minded thinking are also essential elements for good forecasting.
1973 may be granted as the most pivotal year in energy history. The energy crisis defining the period began on October 17, 1973, when the Arab members of OPEC along with Egypt and Syria, all together comprising OAPEC, decided to place an embargo on shipments of crude oil to nations that had supported Israel in its conflict with Syria and Egypt, mainly targeting at the United States and Netherlands. The result of this decision also brought about major oil price increases. Because of the fact that OPEC was the dominant oil distributor at the time, the price increase implied serious impacts on the national economies of the targeted countries, therefore suggesting an international range crisis. Although the embargo was lifted in March 1974, the effects of the energy crisis, mainly in terms of price increase, lingered on throughout the 1970s, with the Iranian crisis aggravating the situation (see also 4.1).
Suggesting a crisis that was mainly expressed on the basis of high energy pricing, the outcome of the previous questions concerned with the determination of energy price influential parameters may be illustrated. In fact, the impact of a more or less unanticipated event changed the correlation patterns between supply and demand and imposed the attachment of high tensions in the market balance, the latter entailing the high volatility of oil price and its potential outburst ever since (Regnier, 2007). The market structures, the dominance of OPEC and the political tension, all suggest aspects of the crisis illustrating the importance of considering qualitative parameters as well. As Godet well pointed out, one cannot neglect the wishes and decisions of major actors when configuring the future (e.g. OPEC members).
Similar to the 1973 oil crisis, the California energy crisis occurring some 27 years later also revealed the strength of key actors in completely changing what was meant to follow a past trend or ameliorate a past situation. The deregulation of the electricity market in California (during 1998) targeting to decrease the highest of retail prices among the States turned into a complete fiasco that abetted the manipulation of the market by the energy companies. The crisis main characteristics involved very high wholesale prices, interrupted service of customers (rolling blackouts), bankrupt utilities and huge state expenditures, while the crisis main causes were:
- The lack of new generating capacity inside California (California was heavily dependent on energy imports from nearby states (CEC, 2007a)).
- The coincidence of a dry year and natural gas spikes with other market oriented factors (California was largely based on hydro and natural gas for the consumers' electrification).
- The market structure allowing generators to manipulate wholesale prices in the power exchange market through escalating power plants' outages that caused market disorder (on the other hand there was a retail price cap that did not allow the investor owned utilities to pass the increasing cost of wholesale purchases to consumers).
- The delay and inability of the regulators to predict the crisis and respond to it (it was only after a certain time that a wholesale cap was set by the Federal Energy Regulatory Commission and an increase of retail prices was allowed to the investor owned utilities).
Emphasizing on the manipulation of the market by the energy generators, in 4.2 one may observe the out of schedule power plant outages rapid increase during the period of the crisis, even exceeding 10GW (approximately 20% of the total installed capacity), responsible for three series of rolling blackouts. No prediction could have captured the 300% and 400% increases of power plants outages. The analogous increase in wholesale prices being the result of the appearing power deficit caused the major suppliers (3 major investor utilities (IOUs)) to be trapped between remarkable wholesale price increases and a fixed retail price (see 4.3).
Further, as seen in 4.3, in the early days of deregulation a relatively smooth trend was to be encountered as far as the wholesale market prices are concerned, this also not implying the rapid increase of prices following. Accordingly, although not influenced to the same extent that the IOUs were, the instant impact to the final consumers must also be considered. Note that according to the rough forecast of retail electricity prices -being based on the respective past data- the increase of retail prices was not to be expected either because deregulation promised for a lowering of prices or because the trend applied entailed much lower prices then the ones actually presented at the time (see also 4.4).
Similar to this, predictions involving oil pricing before the 1973 crisis and relying on extrapolation techniques (Anon, 1973) expected that world energy consumption would keep up in the increasing rates of 5% up to 2000. If having managed to somehow foresee the 1973 oil price increase, the predictions made would not be exclusively based on the past data trend that would undoubtedly provide a misjudgement of future prices (see also 4.5). What actually followed for the years to come (1980 to 2000) was a 20 years mean annual increase rate of 1.7%. Furthermore, if only having used quantitative data, none could have predicted before the crisis that USA would cut back on oil use. In , 4.6 the response of the USA to the crisis effect reveals the review of energy patterns issued by the government for the times to come. What is also interesting to note in the is the lead time in order to adapt to the new situation encountered (e.g. the natural gas contribution share started increasing 5 years after the crisis).
Another critical point concerning the weaknesses of forecasting previous to crises, not related to the use of numerical past data, may be met in the case of California. Once the regulators and the state adopted a deregulation system that was elsewhere applied successfully (Woo et al., 2003), they decided to proceed in certain modifications (i.e. partial deregulation and imposition of retail price caps) without bothering to consider the different characteristics, features and conditions of operation encountered in the California environment. Hence what might have been thought as successful elsewhere would not be a priori successful in California as well. Finally, if the modification of market structures and potential manipulations had been taken into account via the implementation of alternative scenarios assessing the risk of deregulating the Californian electricity market, certain versatile mechanisms that would instantly respond to a potential crisis may have been put forward. From the analysis provided it becomes clear that forecasting methods that solely rely on past data trends, disregard the wishes of relevant actors and major players, and do not consider the conditions forming the environment where the phenomenon develops cannot capture a broader view of the situation and thus give valid predictions.
As already addressed, the limited ability of quantitative parameters and extrapolation techniques to provide a valid forecasting, especially in the case where a crisis was to follow, is indisputable. To validate the conclusion made and further support Godet's beliefs an example is presently given. Using the installed nuclear power data between 1967 and 1987 along with the application of extrapolation techniques (the forecast function is currently used) one may present the expected nuclear capacity time evolution for the next twenty years. A straightforward comparison of the extrapolation s with the respective real data for the period 1987 to 2007 is available in 5.1.
What of course cannot be captured by the extrapolation technique is the Chernobyl crisis, deeply influencing any further development of the nuclear installations. It was on the 26th of April 1986 that reactor number four at the Chernobyl Nuclear Power Plant, located in Ukraine exploded. By considering the magnitude of consequences that the Chernobyl accident entailed (UNDP & UNICEF, 2002), one may easily realize the cut back of nuclear capacity in the years to come. Furthermore, what is interesting to note is the different influence that the Chernobyl accident had in countries around the world. In 5.2 one may see the immediate response of the Russians, the Germans and the Ukrainians, while it took a little longer for the USA to reconsider its nuclear program. On the contrary, countries like France and Japan continued to install nuclear plants, while on the other hand Italy abandoned its nuclear program and gradually decommissioned all of its plants (NEA, 2007).
What is evaluated here, is the conditions configuring the future. Although in a global level, nuclear capacity did stagnate, this was not the case for every country. Depending on each nation's needs, requirements and obligations, a different energy policy may be drawn. If not properly weighing these factors in the forecasting process, the outcome cannot be valid.
Based on s 5.1 and 5.2, one may also note the lead time of both the international community and the selected countries. Regarding the response of the world as a whole, a period of 3 to 4 years is to be considered for the international community to perform the actions concerned with the decision of cutting back on nuclears. As already noted, a varying response time met in different countries may be partially ascribed to the distance range from the area of the accident. However, a bundle of parameters should be evaluated in order to explain and predict each actor's wishes, obligations and decisions.
Moreover, when investigating the long term evolution of nuclear power, one should also consider the factor of a rapidly changing environment. Since the Chernobyl accident and the stagnation of nuclear power occurred, any attempt to reestablish previous growth rates has to deal with competitors such as the galloping natural gas market, the return of the coal sector and the maturity of renewable energy technologies (Lovins, 2005). Besides, the considerations regarding waste management, decommissioning expenses and the risk of a new Chernobyl still remain strong.
Europe becoming increasingly dependent on imported amounts of energy is indisputable. According to the estimations of the recent business as usual scenarios (EC, 2007), it is expected that the energy imports' dependency of Europe will increase from the present 50% to a total of 65% by 2030. Within this forecast, reliance on imports of natural gas is expected to increase from 57% to 84% while the respective increase for oil imports shall correspond to an additional 11%, i.e. from 82% to 93%.
In this context, European countries and Russia hold a strong interdependency bond based on the significant European energy imports of oil and natural gas supplied by Russia. Note that loss of autonomy is always a side effect of an interdependent relationship as the parties are constrained by their need for one another. Gazprom being the largest Russian company and the greatest natural gas exporter in the world (Cedigaz, 2007) constantly raises its share in the European market, with the respective volume of natural gas supplies reaching 161.5 billion cubic meters during 2006 (Gazprom, 2007), equal to approximately 26% of the total European natural gas needs. Being also Russia's single natural gas exporter (according to the Federal Law on Natural Gas Exports adopted in July 2006), Gazprom alone utilizes the existing natural gas pipelines in order to supply Europe (see also Appendix, Existing Natural Gas Pipelines).
Meanwhile a series of recent and past events mainly suggesting disputes with Ukraine and Belarus (Bruce, 2005; Stern, 2006) have questioned the security of supply towards Europe, this revealing the potential gaming behavior of the Russians, either to satisfy political purposes or simply take advantage of the energy card in terms of increased pricing. Similar to the 1973 energy crisis and the recent oil price major increases, a scenario concerned with the raise of European natural gas supplies' price by Gazprom is to be examined. The scenario supports that unless the desire of Gazprom for a 200% increase of natural gas prices is satisfied, supply towards Europe will be stopped.
Given the threat of a 200% price increase of natural gas heading towards European countries, an effort is presently carried out in order to investigate the measured responses of both an energy supplier and an energy user being involved in the potential crisis occurrence. Because of the particular features attributed to the subject under investigation, several cases of different energy suppliers and users may be examined. A macroscopic approach may consider two major sides, i.e. the European countries and Gazprom (Russia). However, a closer look focusing on country level and considering organizations as well is thought to be essential in order to better evaluate the situation. As already seen in the previous question concerned with the nuclear power evolution, not all countries responded in the same way to the Chernobyl crisis (NEA, 2007). Working on a country level, energy users will derive from the main Gazprom customers in both Western-Central Europe and the Commonwealth of Independent States (CIS)-Baltic countries (see also Table 6.I). On the other hand, the major energy supplier shall refer to either Gazprom or another natural gas supplier. The alternative of considering different energy sources' suppliers will be also outlined. Furthermore, both conservative and more extreme solutions responding to the problem will be considered.
Table 6.I: Key s of Gazprom main customers during 2006 (Gazprom, 2007)
CIS and Baltic
Percent of Domestic NG Consumption (%)
Percent of Domestic NG Consumption (%)
The barometers of Ukraine and Belarus
Based on the special geographical position of Ukraine and Belarus as well as on the fact that along with Russia, all three have not ratified the European Energy Charter treaty (European Communities, 1997), both these countries will be treated as a separate case. Note that until the plans concerned with any new pipelines being built are materialized (Borisocheva, 2007), any energy exports of Gazprom are necessarily crossing either via Ukraine or Belarus to reach the rest of Europe (see also Appendix, Existing Natural Gas Pipelines). Moreover, although efforts have been made from the Gazprom side to purchase the rights of the pipelines within the territories of Ukraine and Belarus, the two countries' governments are not yet willing to give up on their negotiation strong card.
To set the basis of interaction, Ukraine will be currently used as an example. The Ukrainians are largely dependent on the natural gas imports from Russia (approximately 78% of the natural gas consumption in 2006) while their alternative energy options regard the gradually aging nuclear plants, oil imports coming from Russia, the coal sector being determined by declining production capacity and low investments, and a hydro share equal to 1% of the total energy needs (ΕΙΑ, 2007d). On the other hand, although Ukraine is currently exporting 25% of its electricity generation, nuclear power plants gradual decay reveals the dependence on Russian imports (approximately 50% of the electricity generation is covered by thermal power plants).
Taking into consideration that the interdependency bond and political tension between Ukraine and Russia may be granted as much stronger than the ones describing Europe's and Russia's relationship, an incremental solution seems the most rationalized scenario to be considered. A compromise between the two sides may be achieved through the balancing of each one's advantages. In brief, Gazprom is not willing to jeopardize security of supply for the greater part of the European market because of high pressures put on Ukraine to accept price increases. On the other hand, measured pressures may lead to negotiation of transit tariffs and a revisal concerning the purchase of the Ukrainian pipelines by the Russians. Regarding the Ukrainians, if balancing the situation they must on the one hand use their pipeline strategic position in order to negotiate natural gas prices and on the other think of both their dependency on Russian imports and the possibility that the latter may eventually find new ports to enter Europe (see Appendix, Proposed Natural Gas Pipelines). What is expected is a rearrangement of prices in a level that partly satisfies both sides, similar to the decisions taken in former crises in the area (Bruce, 2005; Stern, 2006). Acknowledging the political tension between the two countries (Hesli, 2006), management solutions with linkage to other issues is also under consideration. Having underlined the importance of the Ukrainian and Belarus bottlenecks, a discussion considering the wills and wishes of the main European countries is following.
In 6.1 one may obtain the time evolution of Russian gas exports to the main European recipients while in 6.2 the corresponding shares of natural gas in the national electricity consumption are illustrated. As previously seen (Table 6.I), Germany along with Italy and Turkey are at the moment the main importers of natural gas from Russia. However it is Slovakia and Hungary that comprise the most dependent of countries in terms of local energy balance with 30-35% of their energy needs being covered by the Russian natural gas ( 6.2).
Hence, as far as energy users are concerned, in order to give a measured response one should consider both the share of the imports in the national energy balance and the amount of energy being imported. Higher levels of both parameters imply higher interdependency among the supplier and the user (e.g Slovakia, Hungary, Germany and Italy), this possibly suggesting the adoption of incremental rather than more extreme decisions. Although one may argue that given the magnitude of the imports' dependency and the price tripling would make the respective EU national economies to suffer, potential solutions and especially alternatives should be considered more closely. On the other hand, it is thought that countries with lower dependency levels may either choose to partially tolerate the price increases (e.g. France being also described by a strong national economy) or seek for alternatives without being equally sceptical.
Any case given, being on the energy importer side, one should examine the:
· Alternative sources of natural gas meaning existing supply networks, reserves and conditions of potential contracts. More specifically, alternatives concern either the provision of greater LNG quantities from Algeria, Nigeria and other suppliers (see 6.3) with a limited number of LNG terminals existing in Europe (CEC, 2007b), or the exploration of European reserves. Although the production capacity of the three major European producers (see 6.4) well exceeds the corresponding annual Gazprom share (160 billion cubic meters), the dry natural gas requirements of Europe are 80% higher than the current production.
· Examination of the natural gas imports final energy destination, i.e. electricity, heating or other purposes and potential level of substitution by alternative energy sources. Depending on the available energy sources of each country and the existing infrastructure and technology, the level of substitution may be determined. Although renewable energy sources have a considerable contribution in the EU electricity sector the same cannot be supported for heating applications (Schäfer, 2005). Exploration of coal reserves and further oil dependency along with a nuclear revival may also be discussed. Strategic reserves' exploration is also useful in the short term.
· Decisions concerned with the aforementioned use of alternative sources in dependence with environmental commitments and existing energy infrastructure. In respect of the alternative concerning further oil dependency and coal exploration, environmental restrictions and constraints adopted by the EU countries within the Kyoto protocol framework tackles any long term thoughts of reliance on the specific energy sources. However in terms of a short term adjusting period to whatever the new reality might be the exploration of these sources is rather possible.
· Implementation of energy saving measures and policies in order to cut back on energy consumption and imported energy in order to counterbalance the crisis impact. Similar to the policy measures enacted in both after the crises of 1973 and 2000 (oil crisis and California market crisis respectively) by the USA and California (EIA, 1998; CEC, 2005b), a potential of 20% energy saving is said to be possible for the EU (EC, 2005).
· Investment on research and development concerned with energy technologies or cutting back of the corresponding and other funds in order to invest on short term, practicable solutions.
· Intensification of negotiations and lobbying in order to either compromise or impose one's will. Political pressures at any given level may be exerted by either side.
On the other side of the chain, being concerned with energy suppliers, the following cases may be considered.
* The energy supplier is considered to be Gazprom. In this case, depending on the level of satisfaction gained by the negotiations with the European countries, the Russians may continue to invest on the interdependency bond. Otherwise the examination of new markets, namely China may be considered (Tsakiris, 2007).
* An alternative natural gas supplier is considered. As previously seen, either the exploration of indigenous natural gas resources or the increase of LNG imports involves further establishment of already existing suppliers (e.g. Algeria) and producers (e.g Norway and Netherlands) that would be willing to take advantage of the crisis impacts by selling at higher prices.
* Alternative energy sources suppliers enter the market. Various lobbies may be taken into account, i.e. from the promotion of renewable energy sources to the revival of nuclear power.
Taking into consideration the potential combinations of energy users and energy suppliers, the above mentioned reactions may significantly vary. What may be supported however is that on a country level more measured responses and reactions are to be expected. Again emphasizing on the two parties' need for one another (i.e. Gazprom and European countries), a settlement concerned with resulting to a satisfactory price is thought to be finally established. Looking at previous market disorders expressed on the basis of supply cuts by the Russians, a decisive cut back on natural gas imports was never practiced by the Europeans. Overall, although short term drops were encountered (meaning higher prices), the supply of natural gas towards Europe is actually determined by a 15 year mean annual increase of 1.1% ( 6.5).
Considering a more microscopic approach, i.e. on the basis of an organization, analogous reactions and responses are to be considered. What is thought to be different however is the greater levels of flexibility describing the considerations of say a major private energy supplier or user (Gazprom being partially state owned cannot be equally treated). Seeking solely profit maximization and damage minimization, provided with comparatively sufficient alternative options (because of the scaling, a firm/organization has better options of either meeting its resources' requirements or supplying new customers in its short term perspective lifetime scale) and implying considerably lower lead times, firms and organizations appear to be less constrained.
As already implied the designation of a response as being incremental or out of the box depends on several factors. The level of flexibility, the risk assessment granted as either passive or active, the comparison with other relevant players' responses to the problem, all together decide whether the decision made was conservative or extreme. Besides as previously pointed out, it is believed that a realistic approach concerned with the scenario of skyrocketing prices leans towards compromising solutions for both parties. The stronger the interdependency bond, the harder to break. Given this constrained flexibility of macro-players (country level approach), either to proceed to radical energy mix changes (European countries' side) or pursue new continent-scale markets (Gazprom side), out of the box solutions seem to fade out as we head towards macroscopic approach (see also 7.1). On the other hand, as previously explained, energy organizations and firms (micro-players) being comparatively more versatile may choose to be more active as well ( 7.1).
With regards to the available options, choosing to diversify in terms of supplier but not in terms of fuel may comprise an extreme solution if considering a complete shift, e.g. from dry gas to LNG, but may be granted as incremental if taking into account that the dependency bond is still present. France choosing for example to be supplied from Algeria with relatively lower LNG prices (Algeria would also be willing to benefit fromm the crisis impacts) instead of paying the 200% price increase to the Russians is less out of the bloom in comparison with Italy practicing the same way when the Southern Europe Gas ring project is under consideration (see also Appendix, Proposed Natural Gas Pipelines) and the Italians imports reached 22 billion m3 in 2006 (see also Table 6.I). Similar to this is the example of the Italians' response to the Chernobyl crisis. While at the time the majority of the international community gradually decided to stop further nuclear power installations, Italy went a step further and proceeded to the decommissioning of all its plants (NEA, 2007).
Next, choosing to diversify in terms of energy sources is an a priori more aggressive strategy. Still, using the former example, the Italians deciding to revise their nuclear prospects is not as much expected as it is for the English men to further invest to offshore wind energy or for the Spanish to insist some more on solar thermal and photovoltaics. Given the level of dependency aimed and the innovative character of the decision made, the dissociation between extreme and conservative may result. As far as the energy saving strategies implementation is concerned, unless strongly put forward, the latter may only be granted as complementary to the above options. Finally, intensification of negotiations and lobbying in order to alleviate the crisis in a political level is something to be expected.
Recapitulating, some examples were currently laid in order to underline the sense of relativity when regarding conservative and out of the box responses. Studying the environment that the phenomenon occurs and picking out the actors to examine is of primary concern in order to determine the elements of flexibility to act and of risk to incur when regarding one's measured response.
Given the up to now analysis, it has become clear that a conservative response not vitiating the current liaison and involving price settlements and leveled adjustment in terms of alternative suppliers'contribution and new markets' consideration, alternative energy sources' introduction, energy saving policies and measured investment on research and development projects, is the most rational scenario. Having to deal with out of the box solutions, one should consider higher risks and greater lead times on the one hand, potential achievement of security of supply and greater independency levels on the other. On the contrary, when considering the most conservative of solutions, a short-term perspective may seemingly avoid higher risks and potentially capital intensive alternatives but may on the other hand strengthen the interdependency in favour of one actor.
Acknowledging the merits and limitations for each of the possible responses, one should look for the golden section in order to proceed to the best decision possible. More specifically, if correctly measuring the ability to withstand to a number of potential decisions in order to disengage from the crisis impacts and also being able to forecast the lead time in order to materialize the decisions made, one may assess the critical point (i.e. assess the risk of a decision) further from which successful strategies are dubious. Out of the box solution involving high levels of risks move closer to the critical point while conservative approaches safeguard the ability to withstand and proceed to moderate responses (see also 8.1).
Acknowledging the magnitude of the potential crisis, deep impacts should be expected in the European economies importing large amounts of Russian natural gas. Since the scenario of equally treating all actors is not realistic, emphasis will be currently given in the EU block. The Europeans diachronically experience greater natural gas price increases than the ones corresponding to the CIS block, although recent crises may support the opposite (Gas Matters, 2007). During the past, price increases for the Europeans peaked at 120% in 2000, however smoothening in the years to come, i.e. suggesting a mean annual increase of 22%, while considerably lower s may be observed for the CIS countries (see 9.1). Although managing to deal with the past price boom (from below 50$/mcm to over 100$/mcm), the hypothetical 200% price increase over say 293/mcm (being the current European average; Gas Matters, 2007) implies the economies' major wobbling.
In order to illustrate the impact that a 200% increase of natural gas imports would imply for major European importers, a common, rough comparison basis assuming that all energy sources' consumption contributes the same in the national domestic product, will rely on the variation of the energy intensity index, before and after the crisis' occurrence. What the latter demonstrates is the general relationship of energy consumption to economic development with high values of energy intensity implying inefficiency in converting energy into GDP. Based on data concerned with the contribution of the Russian natural gas imports in the primary energy mix of the selected countries (EIA, 2007e; Eurostat, 2008a) and taking that the introduced annual imports' increased cost (analogous to the share of Russian natural gas in the primary energy consumption) is incorporated in the GDP equation, the variation of energy intensity may result ( 9.2).
As one may observe in 9.2, the economic development of countries demonstrating strong interdependency bonds with the Russian imports is seriously tackled. In fact countries like Slovakia, Hungary and Czech Republic are not expected to withstand such a turn out in the long run. On the other hand, countries combining lower reliance on imports and exhibiting lower energy intensity rates (e.g. France and Italy) seem to be more capable of tolerating the situation.
Another critical aspect of the imported energy price increase is the influence the latter would have in the final consumers, i.e. would the state leave the price increase reach the final energy customer? Although this much depends on market structures, a rough picture may be obtained by s 9.3 and 9.4. In 9.3 one may observe the time evolution of natural gas household pricing for three selected countries (Slovakia, Turkey and Czech Republic), demonstrating the higher percentage of domestic NG consumption covered by Russian imports (see also Table 6.I) versus the corresponding average of European countries. Although it may seem misleading to use the European average, the argument that a strong relation between the imports' cost and the respective household pricing is valid (especially during the last years) may be supported.
Following, in 9.4, the disengagement of import's pricing from the pricing reaching the final consumer is expressed on the basis of the taxation share. Given more or less that all the taxation policies studied (although studied for a short term) imply a relatively stable tax percent, it is believed that unless measures such as retail price caps (only this time used to protect customers and not comprise the regulators' failure, see also the California crisis in question 4) are issued, final consumers will also suffer the impacts of the crisis; others more and others less, this depending both on the imports' price and the taxation percent imposed. What is interesting to see is the case of Hungary, deciding to increase its taxation from 13% to 16.6% in half a year's time (Hungary is also heavily dependent on Russian imports, see Table 6.I).
On the other side of the spectrum, if the potential increase of prices is handled otherwise, there is a ground for potential benefit for certain European countries. The obvious example encounters major natural gas producers discussed above (see also 6.4). The margins of benefiting are of course directly related to the pricing of imports (reasonably enough selected to be rather increased, however below the one imposed by Gazprom) and the final amount that the former will manage to provide the market with.
To mitigate the results of similar pricing outcomes, the Californian state had to purchase long-term contracts that reached $40 billion during the past. Signing binding long term contracts (if possible and if binding) implies analogous long term debts. Issuing temporary retail price caps may protect the consumers but may imprison local natural gas distributors. Choosing to radically diversify either implies changing supplier (new interdependency bonds) or investing on alternative technologies plus modifying one's existing energy infrastructures (capital intensive solutions). The weighing factors for what the decision should be have already been analyzed in previous questions. The golden section of the ability to withstand and the ability to proceed has been outlined. Any case given, security of supply comprises a major issue for every economy and country as a whole and requires both long term view and short term action. Regardless the ability of one to completely withdraw from such interdependency bonds, the intensification of efforts in order to maximize “energy freedom” (not however disregarding environmental protection and sustainability patterns) should be promoted. In this context, the concept of energy saving-conservation and optimum energy mix configuration are drivers suggesting change of consumption patterns and adaptation to present and future requirements while at the same time promising for the least-cost responses to be considered.
The inequity observed in every aspect and in every level of the human societies' structures may be perfectly reflected by the variation of energy related indices. In 10.1 one may obtain a rough picture of how this variation is depicted in the world regional level. Both the welfare and the impact on ecosystem are well captured by the indices concerned with energy consumption, CO2 emissions and human development.
Although acknowledging the fact that energy is often treated solely as a commodity, both ethical and more practical considerations like issues of equity, sustainability and system capacity are critical parameters in the configuration of energy consumption patterns. If willing to meet all of these “commitments”, allowing both the under development and the third world countries to develop (Crompton and Wu, 2005) and managing not to exceed the given ecosystem's capacity in the long run (Omer, 2007) (future generations' consideration) comprise two conflicting drivers.
What both drivers however clearly imply is that developed countries should reconsider their energy patterns, while what is interesting to note is that resulting high energy pricing may actually comprise both a motivation for individuals and a tool for decision makers to encourage energy conservation and saving (Herter, 2007). In this context, “doing more with less” has already been addressed in the EU level (EC, 2005) with the magnitude of potential energy savings up to the year 2020 broken down in table 10.I.
Table 10.I: EU-15 potential energy savings (EC, 2005)
Rigorous Implementation of Adopted Measures
With the Implementation of Additional Measures
Other Energy Transformation
Total Energy Savings
Further insisting on the above discussion and also considering the argument previously made concerning micro-level decision flexibility (see also 7.1), the response of individuals living in the developed world comes to the fore. Practically speaking, in order to reduce one's energy consumption a number of measures and ideas may be adopted. A slight change of our everyday behaviour towards energy consumption may result in significant savings (even reaching the percentage of 10-15%). Additional energy saving may be obtained if adopting more radical, attitudinal solutions as well. Some certain ideas concerning either a more rational use of the means already utilized or the latter's substitution by less demanding applications, are given in the Appendix (Behaviour and Attitude Change Over Energy Saving Measures), with the majority of them thought to be realizable.
Concerning attitudinal solutions, the most serious constraint is in most cases high initial cost. Even if the amortization time does not exceed the life-expectancy of the application considered, the idiosyncrasy and culture of certain people comprises an additional barrier. It is in this context that the shaping up of each individual's consciousness becomes critical. Serving the dictates of energy saving and conservation suggests an immediate, efficient and cost effective response that supports the establishment of sustainability patterns, encourages the development of the most deprived and protects the environment by reducing emissions, reinforces security of supply and eliminates energy interdependency bonds.
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