Ever since the creation of mankind, human beings have always been in search of energy. On the Eve of World War I, First Lord of the Admiralty Winston Churchill made a historic decision with shifting power source of British navy’s ships from coal to oil. After Winston Churchill’s decision energy became the most significant part and power of industry and led countries to clash over strategic energy points during World War II. South Caucasus energy resources played an essential role in the victory of the USSR during WWII. During World War II, Hitler’s plan was to occupy Baku on September 25, 1942. At that time Baku’s oil was providing almost the entire supply of fuel for the Soviet resistance. Anticipating the upcoming victory, his generals presented him a cake of the region -Baku and the Caspian Sea. Delighted, Hitler took the choice piece for himself -Baku. Fortunately, the attack never occurred and Nazi forces were defeated before they could reach Baku.
Energy policy is a big issue that is not easy to deal with. As alternative energy sources require new and expensive infrastructure, traditional energy sources are still in the spotlight. Energy consumption in the EU is more than any other region in the world. On the contrary, the EU is poor in terms of energy sources. Therefore, the EU is looking for new opportunities in terms of energy sources and security of supply. The EU is currently pursuing a soft energy policy. Although the EU wants to create a common energy policy which can allow the Member States to formulate their energy strategies freely, in line with their national interests. Therefore, three major issues; need to ensure required investments, the reliability of exporters, security risks on supply and transit countries, are considered the main strategies for the countries.
Germany is one of the giant countries in Europe that contributes largely the EU’s economy. On the other hand, Russia is the main energy trade partner of the EU and today Russia supplies 35% of the gas demand of Europe. Russian-German relations are formed with the idea of “strategic partnership”. Official closer relations, called “strategic partnership”, have started in the Putin’s period in 2000 when Gerhard Schröder was a chancellor. These relations were based on the personal friendship of Putin and Schröder. Since 2000, the relations between Russia and Germany have intensified. In a short time, Germany became Russia’s biggest trading partner. In fact, a partnership between Russia and Germany covers all spheres of their economies, but the energy sector has the utmost importance in terms of trading relations. Russian-German partnership is important for the EU as well, because the EU, particularly CEE region is highly dependent on Russian energy. The largest gas trade between the EU and Russia was initiated by the North Stream project. Russia sells 55 billion cubic meters gas with this pipeline to Europe. Currently, Russia tries to implement North Stream-2 pipeline project, which Germany also gives a great support for the realization of this project.
After the Ukraine crisis, the strained relations between Russia and the EU began to soften after Germany’s willing to work with Russia in the energy field. In this regard, North Stream-2 pipeline project can be considered as the most important step in the building strategic energy partnership. Here is a question arises. Why does North Stream-2 important for both side? Firstly, Russia will sell 110 billion cubic meters gas to Europe after the completion of this project. This is quite a huge amount in terms of both European market and energy demand. While a number of states, NGOs and institutions emphasize the importance of alternative energy resources, at the end they give an ultimately tussle on the traditional energy resources.
Such dependence of energy market on Russian resources is a real and major threat to Europe’s energy security, however, one of the ways to minimize this threat is cooperation with Russia. The reason is that the Russian economy also depends on energy income and stopping the flow of energy can blow the Russian economy at the same time, considering the fact that there are numerous sanctions on Russia. That’s why Russian authorities also understand that creating a crisis or conflict is not only a solution and way to ensure political and economic interests. In fact, this mutual dependence results with softening of tense relations between Russia and the EU with strategic energy projects.
Secondly, Germany wants to become the main gas distributor in Europe with North Stream-2. Germany is one of the main importers of Russian gas in the EU and being an energy hub will bring huge capital flow to the German economy. Consequently, Germany will become more influential in the policymaking process in the EU.
Russian-German rapprochement may undermine the EU’s energy targets which aimed to ensure the security of supply by diversifying routes. Because North Stream-2 is proposed to extend German-Russian pipelines in the Baltic Sea. In addition, North Stream-2 is designed to completely isolate Ukraine and Poland from energy issues. As a result, due to increasing amount of energy flows, Baltic states are skeptic about their energy security and North Stream-2 is not welcomed in this region as well as in the CEE because of two previous serious gas disputes.
Germany knows how to play well in the politics chessboard. After the spyscandal, Germany expelled 4 Russian diplomats in order to show solidarity with the UK. But a day later Germany announced its support and green light to the Russian giant energy company Gazprom in the context of North Stream-2. In fact, this step of Germany can soften and regulate tense relations between Russia and the EU. Because mutual interests of Russia and the EU stand on the grounds of economic relations. These mutual interests cause Russia and Europe to constantly need one another. but this need is different on both sides and defines their political power according toits rate and range. The EU is an organization itself that unites industrialized and developed countries. This allows the EU to meet their demands in the internal market. The only problem is the lack of energy resources. However, this situation is completely different in Russia. Although there are agrarian and industrial spheres in Russia, revenues here form a very small part of the budget. In addition, Russia’s aggressive foreign policy has led to a series of sanctions and serious hit its economy. Russia provides 90% of its budget through revenue from energy resources. Therefore, the European energy market has significant importance for Russia. Due to this fact, in the previous years, Russia gave rigid reactions to the projects that the EU wanted to implement. One of them was the Nabucco pipeline project and during the negotiations, this project was abandoned by the participant countries.
Despite Russia turned into a major partner of the EU in the energy sector with North Stream projects, current sanctions on Russia and diplomatic crises make the EU’s cards much more powerful. Germany’s cooperation with Russia can lead to softening of the EU-Russia relations, as well as the expansion of EU’s diversification policy. On the other hand, Russia’s approach and stand are still uncertain. Germany and the European Commission are facing a similar dilemma; they are trying to break Russia’s antitrust image while also expressing disapproval of Moscow’s foreign policy. German Socialist MEP Martina Werner once said in her interview that “The reality is that when it comes to gas politics, Russia is a more reliable partner than in the geopolitical context. The Russian economy is highly dependent on the income from gas exports to the EU, which creates a strong mutual dependence between us. In foreign policy, on the other hand, Russia is much more unpredictable”. Therefore, it is important to find alternative routes for the EU and Germany as well, because this uncertainty can lead to a serious crisis which happened before. In this regard, especially South Caucasus and Caspian Basin are more important with its geopolitical position.
The South Caucasus is an important geo-strategic region with its position and natural resources. Especially Azerbaijan and Georgia form transport routes between the Caspian Sea and the EU. After the dissolution of USSR, Azerbaijan’s geopolitical position has raised the importance of its natural resources. The Contract of Century (Agreement on the Joint Development and Production Sharing for the Azeri and Chirag Fields and the Deep Water Portion of the Gunashli Field in the Azerbaijan Sector of the Caspian Sea) was signed on September 20, 1994, and it was a very first agreement led Azerbaijan’s oil to enter the world energy market. This contract also made Georgia to become the main transit route in the region.
Russia and Germany have extensive relations and interests in South Caucasus. Starting from 2011, with the Southern Gas Corridor this region became more important in terms of diversification and security of supply. Although its close cooperation with Russia on energy, Germany is also interested in alternative routes, especially in the South Caucasus region. President of USA, D.Trump criticized Germany as being “a captive” of Russia and stated that the US doesn’t want to see its allies are highly dependent on Russia in energy. It is quite understandable because the US wants to sell liquid gas to Europe, which is more expensive than Russian gas. Therefore, Russian gas is more beneficial at this moment for the EU and Germany as well.
The EU strongly corporates with Azerbaijan and gives serious support in order to implement gas projects by Azerbaijan. At the same time is the main trade partner of Germany in South Caucasus. In this regard, A.Merkel’s South Caucasus visit is particularly important in terms of geostrategic energy politics. Azerbaijan plays a crucial role in South Caucasus due to its natural resources and position. Especially the Southern Gas Corridor (SGC) is important in terms of EU’s diversification strategy. Azerbaijan provides gas to South Europe by TAP project and in future, it is planned to extend SGC’s range into most important regions of the EU. The most important nuance here is that, if the Trans-Caspian project is to be realized, the Southern Gas Corridor will provide Europe with a much larger amount of energy resources. Currently, Azerbaijan is able to provide 10 billion cubic meters gas per year to Europe by 2019, however, by 2022, this amount will be 16 billion cubic meters gas per year. On the other hand, Trans-Caspian pipeline project will increase this capacity enormously and as a result, Azerbaijan will become an important gas distributor and transit country.
Azerbaijan is rich in oil and gas reserves and in 2017 Azerbaijan was the largest trade partner of Germany with 66% of total trade between South Caucasus (Azerbaijan, Georgia, Armenia) and Germany. Azerbaijan and Germany corporate closely in the energy sector and more than 200 German companies operate actively in Azerbaijan. Azerbaijan is important for the EU and Germany due to several reasons:
1.Azerbaijan’s geographically location makes it opening the door between Asia and Europe.
2.The EU tries to implement energy strategies on diversification of routes in order to reduce its dependency on Russia. Therefore, the EU and Germany give support to the SGC and TAP in order to ensure its security of supply. Because these projects are the most optimal way to export energy resources of the Caspian region to the European market without any intervention of Russia
3.If Trans-Caspian is implemented, it will be possible to export natural resources of Iran, Iraq and Turkmenistan by passing through Azerbaijan to Europe.
Legal status of the Caspian Sea also should be emphasized in the context of energy relations. The five Caspian littoral states signed Convention on the Legal Status of the Caspian Sea and this convention gave a ground that other countries cannot intervene in the projects unless they are official partners. This convention also allows those exporter countries to build their energy strategies independently. Another look of this convention is that if Trans-Caspian is implemented it may reduce the influence of Iran and China on this region. In this regard, Russia will be more interested in this project, because in this situation China will need Russia even more than previous periods. Russia is interested in less gas export to China from Turkmenistan and this situation can lead Russia to become the main energy partner of China. From Iran perspective, it does not seem realistic that Iran can react against these processes. Because the current political and economic situation in Iran diminished its influence in the region and Iran needs Russia’s serious support after the sanctions as well.
Oil market shrugs off as tensions rise in Persian Gulf region
Despite what was expected, the oil market doesn’t seem to be moved drastically by the recent turbulences in the Persian Gulf region as Iran shot down a high-technology U.S. surveillance drone when it trespassed its borders in the politically sensitive Strait of Hormuz.
Many analysts believe that the reason for this not-too-strong reaction is that the market’s nature has changed profoundly in the last few years and now other driving factors seem to play a more significant role in supporting the prices.
It seems that over time the market is more focused on long-term impacts and events, and going through several shorty lived events in the past few years, oil traders have learned not to bet too much on such incidents.
For the time being, two major factors which are being closely monitored by the market are the U.S. production and the global oil demand.
In recent years, the U.S. production has increased drastically so that the country has become the world’s top oil producer and one the biggest exporters of the commodity. On the other hand, the global oil demand is easing following a slowdown in the world’s economic growth over concerns about the trade war between the United States and China, the world’s two largest economies.
Although the international benchmark Brent gained five percent this week, but market analysts seem to believe that the optimism regarding the outcomes of the upcoming meeting of the Organization of the Petroleum Exporting Countries (OPEC), and hopes for easing of trade tensions between the United States and China are also contributing to the increases in the oil prices beside the rising tensions between Iran and the U.S.
Of course, the tensions in the region cannot be overlooked in addressing the factors which are affecting the oil market.
Since the oil tankers incidents in the Hormuz trait and the drone shot down, many Oil tanker companies have increased their charter rates due to concerns over the safety of their vessels.
According to New York Times, over the last week, the prices reached about $28,000 a day for chartering the largest class of tankers. The insurance costs have also risen for shipping in the region have also risen.
However, even considering all the above mentioned impacts of the rising tensions in the region, the surge in the U.S. production can easily counterbalance the worries of any disruption of oil flows from the Persian Gulf region to the world.
U.S. is now one of the major suppliers of crude oil to Europe and even to Asia and higher shipping prices could be named as the only major factor which signifies the disruption of flows from Strait of Hormuz and it would likely do the most damage to Asian economies.
According to the United States Energy Information Administration, 76 percent of the crude oil that flowed out of the Persian Gulf through the Strait of Hormuz went to Asian markets like China, India and Japan.
However, we should bear in mind that many analysts and traders are well aware that a full cut-off of oil from the mentioned strait is almost impossible, and all the nations in the region would suffer in such a case.
So maybe the market perceives the recent turbulences only as short-term threats which are very unlikely to have a long-term impact on a market which is already on the verge of a potential oversupply due to the U.S. production and end of cuts from OPEC+ group as well as the global economy slowdown.
From our partner Tehran Times
Fossil fuel consumption subsidies bounced back strongly in 2018
Authors: Wataru Matsumura and Zakia Adam*
Higher average oil prices in 2018 pushed up the value of global fossil fuel consumption subsidies back up toward levels last seen in 2014, underscoring the incomplete nature of the pricing reforms undertaken in recent years, according to new data from the IEA.
The new data for 2018 show a one-third increase in the estimated value of these subsidies, to more than $400 billion. The estimates for oil, gas and fossil-fuelled electricity have all increased significantly, reflecting the higher price for fuels (which, in the presence of an artificially low end-user price, increases the estimated value of the subsidy). The continued prevalence of these subsidies – more than double the estimated subsidies to renewables – greatly complicates the task of achieving an early peak in global emissions.
The 2018 data sees oil return as the most heavily subsidised energy carrier, expanding its share in the total to more than 40%. In 2016, electricity briefly became the sector with the largest subsidy bill.
Fossil fuel consumption subsidies are in place across a range of countries. These subsidies lower the price of fossil fuels, or of fossil-fuel based electricity, to end-consumers, often as a way of pursuing social policy objectives.
There can be good reasons for governments to make energy more affordable, particularly for the poorest and most vulnerable groups. But many subsidies are poorly targeted, disproportionally benefiting wealthier segments of the population that use much more of the subsidised fuel. Such untargeted subsidy policies encourage wasteful consumption, pushing up emissions and straining government budgets.
Recent years have seen multiple examples of pricing reforms, underpinned by lower oil prices that created a political opportunity among oil-importing countries and a fiscal necessity among exporters. Reforms typically focused on gasoline and diesel pricing, and in some cases also on LPG, natural gas and electricity tariffs. IEA price data (shown below for gasoline) show clearly the wide range of end-user prices across countries – the lowest prices found among countries that subsidise consumption.
The nature of pricing reforms undertaken in recent years differ depending on the sector and on national circumstances, but fall into three broad categories:
- Complete price liberalisation, typically for the main transport fuels, as for example in India, Mexico, Thailand and Tunisia.
- Introduction of a mechanism for regular, automatic adjustment of prices in line with international prices. China has such a system for oil prices, and similar mechanisms were also introduced in Indonesia, Malaysia, Jordan, Cote d’Ivoire and Oman.
- A schedule of reforms to regulated prices, often with a view to aligning them with cost-recovery or market-based prices. This was the most common type of reform in the Middle East and North Africa, where prices for oil products, natural gas, water and/or electricity were raised in Saudi Arabia, Kuwait, Qatar, Bahrain and the United Arab Emirates. There were also increases in regulated electricity prices elsewhere, as for example in Indonesia.
These price reforms were often accompanied by the introduction of more targeted programmes of support for vulnerable groups. They also brought significant financial savings to the governments concerned, allowing these resources to be deployed to other development or policy priorities.
However, in 2018 the oil price trended higher for much of the year before falling back in the last quarter. This became a major source of strain in countries where consumers were newly exposed to rising retail prices, particularly where national currencies were losing value against the US dollar at the same time.
The rise in retail prices created broader pressure to revisit some of the pricing reforms.
- Some countries with fully liberalised prices sought ways to dampen the effects on consumers, for example via reductions in other taxes and duties (as in India) or via implicit price interventions through state-owned oil and gas companies.
- Upward fuel price adjustments were postponed in some countries that had committed to follow international price movements but retained some administrative discretion over the level and timing of any changes. This was the case in Indonesia, Malaysia and Jordan.
- In fully regulated price environments, the reform schedule was in some cases pushed back or watered down.
Shielding consumers from short-term changes in international fossil fuel prices comes at a fiscal and environmental cost. It also diminishes the potential for higher prices to curb demand and bring the market into balance.
The different reform pathways since 2015 can be separated out into the various components of the change in subsidy values. Pricing reforms over the last three years brought substantial dividends, estimated at 36 billion dollars in total. This represents either a direct easing of the strain on public finances (via reduced public expenditures on subsidies) or additional revenue accruing to resource-rich countries (by reclaiming more of the value that was previously being foregone because of under-pricing).
Notable reductions in oil-related consumption subsidies over this period were observed in many countries in the Middle East, including Saudi Arabia, the UAE, Qatar and Bahrain, as well as in Colombia and Pakistan. Ukraine saw the largest fall in subsidies for natural gas. Subsidies to fossil fuel-based electricity consumption were substantially lower over this period in Russia, Argentina, Indonesia, Pakistan, Turkmenistan and in parts of the Middle East.
However, these falls were outweighed by two other factors: a widening gap between prevailing prices and market-based pricing in many countries (exacerbated in some cases by depreciation of the domestic currencies against the dollar); and increased consumption of subsidised energy.
The largest increases in consumption subsidies for oil products were in Indonesia, Iran, Egypt and Venezuela. In the latter case, a collapsing currency meant that gasoline and diesel sales (where available) were essentially free in dollar terms. Iran also saw the largest increase in natural gas subsidies, and – together with Venezuela, Mexico, Egypt and China – was among those seeing the most significant increase in subsidies to fossil fuel-based electricity.
Committing political capital to subsidy reform remains tough, especially if international prices are volatile. But phasing out fossil fuel consumption subsidies remains a pillar of sound energy policy. Especially when part of a broader suite of supportive policy measures, pricing reform is pivotal for a more robust, secure and sustainable energy sector over the long term.
Industries and households are more likely to opt for energy-efficient equipment, vehicles and appliances. Investors in a range of energy technologies, especially clean technologies, see a better case to commit their capital. That is why the IEA continues to be a strong supporter of efforts to phase out inefficient fossil fuel consumption subsidies.
*Zakia Adam, WEO Energy Analyst
France Shows How Energy and Society Are Intertwined
What should be asked about energy is what Plato’s The Republic through Socrates asked: “What is justice?” If energy has a moral, economic, environmental, and life-saving component then energy in all forms is certainly just.
This is where facts need to be realized, and find out if a carbon-free society run on renewable energy is even remotely possible? Over 6,000 everyday, products come from a barrel of crude oil.
The International Energy Agency (IEA) released The World Energy Outlook 2018 – the self-proclaimed “gold standard of energy analysis,’ – admitting a damning conclusion. That amidst the overwhelming amount of graphs, charts, tables and prognostications, “the percentage of total global primary energy demand provided by wind and solar is 1.1%.”
The world runs off fossil fuels, and no time in the coming decades will clean energy, a carbon-free society, or zero emission energy to electricity or electric vehicles sustain trillion-dollar economies. More alarming is the world’s largest authoritarian, communist government, China, controls 90 percent of the world’s rare earth minerals – “a group of 17 elements with similar qualities that are used in electric car batteries, wind turbines and solar panels.”
Nations, companies, and individuals care about national security, their own “self-interest rightly understood” while meeting the basics of food, clothing and shelter (Maslow’s Hierarch of Needs) – exactly what fossil fuels provide – on an affordable, scalable, reliable and flexible basis for energy to be delivered to billions of people starving for their modern way of life to continue.
We are witnessing an energy clash globally, and nowhere was that better defined than France’s “Yellow Vest” protests that began in late November 2018 and are ongoing. These protests brought a convergence of domestic concerns triggered over a proposed fuel tax hike that hit lower educated, ordinary voters more than educated urban dwellers.
France’s, politicized carbon tax – the theory goes – should be an efficient way to disseminate the monetary consequences of carbon onto the French and global economies; however, that isn’t necessarily the case. This regulatory heavy-handedness by the state has resulted in:
“Decades of global conferences, forest of reports, dire television documentaries, celebrity appeals, school-curriculum overhauls and media bludgeoning,” without examining the facts.
France is a good test case for energy policy moving forward, because if humanity overwhelmingly using fossil fuels are killing plants, animals, the ecosphere and crushing human life than a tax is fair, just and equitable, correct? But that isn’t the case. The earth and human progress have never done better in recorded history. Economic growth and technology are saving us from such historic plagues like poverty, illness and deforestation.
President Emmanuel Macron and the previous administration of Francois Hollande wrongly targeted emissions unlike Germany that is a high-emitter off increased coal-fired power plant use backing up renewables. Macron’s carbon tax went after Yellow Vest protesters who are vehicle reliant. Since France heavily relies on clean, carbon-free nuclear power for their electricity, France is only“0.4% of global emissions.”
Macron is punishing French drivers via punitive tax hikes and it failed. Voters and everyday working citizens aren’t buying carbon taxes or anything that restricts energy and prosperity. Green piety in Washington State in the US was also rejected the same way it was in France.
Cutting transportation emissions are extremely hard to eliminate when the entire supply and value chain of the tailpipe’s emissions are factored into the equation. It’s why electric vehicles (EVs) aren’t as environmentally friendly as advertised.
Carbon taxation like renewables and carbon-free societies have become buzzwords that reveals the disconnect over the properties that constitute a modern society and an “aloof political class that never reasons with their concern over emissions.”
Achieving energy parity at low costs will never be accomplished by imposing solutions that consist of using expensive, unreliable, intermittent renewable energy. Then believing these policy solutions will have zero impact on economic growth and overall wellness. The impact is heavier use of coal.
The European Union (EU) has: “Eleven countries still planning to use coal-fired power in 2030 (in order of increasing installed capacity) are: Spain, Hungary, Croatia, Slovakia, Greece, Romania, Bulgaria, Czech Republic, Germany and Poland.”
All EU countries have been given energy transition funds to exit coal by 2030, but only France is able to withstand the use of coal through heavier use of nuclear. Geopolitical reasons are another reason you will find a transition to the clean energy economy in the coming decades, because of US shale oil and natural gas production – fracking is changing the world.
In general, US shale exploration and production (E&P) is booming like never before. As of December 2018 the United States briefly became a net exporter of crude oil and refined products; and unless voters ban fossil fuel production the US will become energy independent.
The US Department of Interior’s, United States Geological Survey announced in December 2018: “The largest estimate of technically, recoverable continuous oil that USGS has ever assessed in the United States. The Wolfcamp shale in the Midland Basin portion of Texas’ Permian Basin province contains an estimated mean of 20 billion barrels of oil.”
Whereas California doesn’t exploit their Monterrey Shale resources – considered one of the largest shale deposits in the US and possibly the world – since California policymakers are only pursuing clean energy resources. Why does fossil fuel and renewable energy have to be politicized when they could work together? Texas and California should be pioneering world-class energy research together. Fossil fuel could pay for research and development to build better renewable energy, globally scalable storage systems and an electrical grid that is smart, reliable and have a 50-100 year shelf life.
An honest broker of information takes energy choices and consequences of say increasing fossil fuel use by burning copious amounts of coal that China, India, Poland, Australia and the United States are doing versus emission-heavy air that cause all sorts of lung and respiratory illnesses.
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