IEA marks 25th anniversary with expanded role

Robert Priddle
IEA Executive Director

The Paris-based International Energy Agency is marking its 25th anniversary in a year when oil markets are swamped with ample supplies and production restraint measures are needed to prevent another oil price collapse.

This is a far cry from the situation that sparked its creation in 1974. IEA was the response of 16 member countries of the Organization for Economic Cooperation and Development to the 1973 Arab oil embargo and the consequent sudden awareness of the use of oil as a political weapon.

These leading industrial countries were abruptly faced with their vulnerability to oil imports-mainly from the volatile Middle East-upon which they had become excessively dependent over the years to feed fast-developing economies.

Over the past 25 years, the geopolitics of energy have changed dramatically, and IEA's role has evolved accordingly. While it still hews to its original mandate of preserving energy security, IEA's role in global energy markets has broadened to encompass promotion of energy market reforms and environmental initiatives within an energy context.

But the key question that faces IEA now is how extensive is its role in bringing about change in today's energy scene and how relevant is its energy security mandate in this changed context.

Energy security mandate

As described by IEA's previous executive director, Helga Steeg, "The policy and institutional lessons of the (oil) crisis led swiftly in November 1974 to the establishment of the IEA with a broad mandate on energy security and other questions of energy policy cooperation among member countries."

As current IEA Executive Director Robert Priddle noted in an interview with OGJ, "The IEA's role has, indeed, changed, but not our purpose, which is still energy security."

It remains to be seen how effective an agency of governments will continue to be as it pursues that mission in a climate marked by a waning government role in energy policy.

"Governments think their job is to fix the framework within which energy can operate, and they now appoint special regulators to deal with the transition from direct implication to liberal market," Priddle acknowledged. But he believes there is still a need for government intervention in matters of energy security.

He put forward as "a good and encouraging " example the turnaround of the U.S. and German governments, which are rebuilding their oil stocks after deciding, some time ago, to draw them down below the 90-day minimum IEA requirement. For the IEA, this is a significant move, for stocks are the linchpin of its security system.

Energy supply security is still the agency's dominant concern, Priddle insisted, "and liberalization of the markets hasn't changed the options but only raised a number of questions. One of them is: Will these liberalized markets affect supply security?

"For instance, the liberalization of the electricity markets has the effect of reducing the diversity of fuel supplies. Also, what will happen if nuclear power is not replaced (in the energy mix)? It would have implications both for energy diversification and climate change. So the problem is taking on a new dimension. The security emphasis has broadened to cover all forms of energy."

Evolving strategies

Looking at IEA's 25-year lifespan, what emerges as a pattern of strategies is a three-stage adaptation to changes on the world energy scene. These stages happen to coincide with the mandates of the three executive directors who have headed the IEA's secretariat.

The IEA's executive director has specific and far-reaching authority. In particular, it is the executive director who makes the "findings" that trigger the Oil Emergency Sharing System-IEA's founding treaty commitment.

Under Ulf Lantzke, through the early 1980s, IEA was prone to market intervention and firm statements of principle for policy guidance. It tried to fix overall objectives and individual country ceilings for oil imports.

This changed under Steeg, who had been reportedly chosen by then-U.S. President Ronald Reagan to promote market-oriented notions in the organization. But, as Steeg pointed out to OGJ, "A big liberalization move was starting to pervade the energy market and is still going on."

Her successor, Priddle, now must deal with the growing importance of environmental concerns and the growing importance of non-IEA countries on the global energy scene.

U.S. Ambassador William C. Ramsay is IEA's director of relations with the "rest of the world" and will be taking over as deputy director when John P. Ferriter retires in July. Ramsay's job is to help non-members develop energy strategies and adopt policies that will help bolster global energy security and coordinate implementation of commitments under the Kyoto agreements on postulated catastrophic climate change.

For instance, IEA has memoranda of understanding with such important non-member countries as Russia, China, and India involving work programs, statistics, energy efficiency, and pricing. Ramsay noted that even China, which "is harder to convince," still wants to "hear it."

Close relations with non-member countries is but one aspect of the extension of the IEA's energy security concept beyond the oil emergency response mechanisms. For instance, IEA has studied the matter of natural gas supply, "but we were satisfied that the private sector has made proper arragements for supply security, and governments do not need to intervene," Priddle said.

IEA's expanded scope also encompasses instruments and policies that complement and bolster supply security. To keep track of and monitor oil events worldwide, it has established a sophisticated and comprehensive information system-the best known products from which are its statistics and the Monthly Oil Market Report.

These data and analyses contribute to market transparency and, based as they are on the most reliable government, oil company, and other data, have become a benchmark for both past and current events, as well as forecasting. Added to this are in-depth studies on electricity, nuclear, energy research and development, and other non-oil energy topics.

In the same spirit, IEA keeps track of the state of readiness of its member countries to confront any supply disruptions by carrying out regular country reviews, which have been extended to non-member countries.

Beyond providing overviews of selected countries' energy sectors, these reviews also incorporate praise, blame, and recommendations and are intended to set countries on what IEA considers a proper energy path. "Countries are very keen on these reviews," Priddle said.

As dependence on oil is closely linked to the availability and use of other major energy sources, IEA has become closely concerned with natural gas, coal, nuclear, and renewables. And it is actively fostering energy R&D cooperation.

"Some 40 technology cooperation agreements have been signed spanning the whole spectrum of energy, said Priddle. In this regard, IEA acts as a go-between among members.

Environmental issues

Energy conservation is a basic part of the supply security process and is now closely linked to climate change concerns, inasmuch as no viable substitutes for fossil fuels are likely to emerge within the next 20 years.

IEA's long-term priority policy of promoting "the clean and efficient use of fossil fuels" is bolstered by its concern that energy security considerations must be properly taken into account when measures to protect the environment are decided.

Priddle stressed that the IEA has always been set on "striking the optimum balance among policies of energy security, environmental protection, and economic growth." Policy in this area has been built up on the belief that IEA provides the appropriate forum for the continuing debate on energy and climate change.

A recent IEA "challenging paper" explains that, "While climate change provides the rationale for the engagement of environment ministers in the energy discussion, energy policy is, and must continue to be, more than merely the subtext for the climate change debate.

"Climate change (and other environmental issues)," the paper added, "must continue to be balanced with concerns related to the security of the total energy supply and the costs at which that supply can be maintained."

This concern has run through the IEA's environmental policy over the years.

A former IEA executive told OGJ that, in the build-up to the global initiative on climate change, President Reagan had insisted that IEA play a leading role within the secretariat of the Intergovernmental Panel on Climate Change because he wanted energy considerations to retain their priority.

At the time, the U.S. administration was not-as now-intrinsically concerned with the environmental lobby's agenda, and the move reflected the prevailing political preference.

Even now, Priddle is careful to point out that "We are not an environmental organization, and member states can look to the IEA to keep matters in balance-a difficult balance to maintain, but I believe we can achieve it."

Non-member relationships

Nevertheless, IEA's growing involvement with non-member countries is just as much related to the environment as to energy. "The proportion of energy consumed within OECD is fall- ing and is increasing outside," noted Priddle. "This means we have to think of our place in the world."

But Priddle contends IEA cannot overlook its original mandate with these other countries, either.

"It is in our interest to carry a message to big consumers outside (IEA): 'Build up domestic oil stocks.' They are certainly interested and in need of our experience. This experience is welcomed both regarding policies to be applied and when looking for new policies."

In this new context, Priddle claims that relations with non-member oil producers are "much improvedellipseThere is free exchange of information. At this stage, OPEC needs the IEA more than the IEA needs OPEC.

"OPEC countries realize they cannot exploit their resources and be unreliable suppliers. They respect the IEA as representative of consumer interests. And they tell us of their concern over Kyoto arrangements, future oil demand, and taxes."

This view was confirmed by Nicolas Sarkis, head of the Paris-based Arab Petroleum Research Center, who has changed his mind about IEA, which he first perceived to be an instrument of confrontation with OPEC. He told OGJ that IEA "is becoming increasingly useful and indispensable. Its purpose has changed. It is no longer an instrument of war. It has become the representative of oil consumer countries. Its studies and surveys are very useful and provide the best possible information source."

Ramsay was a little less lenient about OPEC, which he said "is still a cartel and works to manipulate oil prices. But it is a player on the oil market and must speak the same language. On a technical level, there is a convergence of the dialogue, but it is unlikely to take place at a political level."

Ramsay conceded, however, that, a few years ago, there would have been a hue and cry over price manipulation, such as current efforts by OPEC and some non-OPEC countries to cut production to boost oil prices: "But, as we don't think this market bouncing around or low prices are a good thing, we tend to now look on benignly if OPEC seeks to moderate instead of accentuate market trends."

Most observers believe that the realities of the geopolitical situation and Middle East current politics make a deliberate 1973-style intervention on the market extremely remote.

But, despite the current comfortable oil supply-demand situation, Priddle warned "that there is still a real chance of an oil supply shortfall"-caused, for instance, by political turmoil in one or more major oil-producing countries.

"But if a severe oil shortfall were to occur now," he explained, "our original oil response has changed. It has been made more flexible in order to reflect the changing nature of the oil market. We rely less on formal measures in the early stages. Stocks are the mainstay of the system, for they reassure."

Managing oil crises

In keeping with its energy security policies, IEA has continued to maintain the International Emergency Program (IEP) in operating shape. This encompasses arrangements for the physical sharing of oil, integrated with oil stocks and demand-restraint measures, in addition to the supporting data system.

At no time in its 25-year life has the oil-sharing system needed to be activated-not during the Arab oil embargo, the 1979-81 Iranian revolution and subsequent Iran-Iraq tanker war, nor even during the 1990-91 Persian Gulf crisis spawned by Iraq's invasion of Kuwait.

The principle is that the executive director activates IEP in the event an oil supply disruption reaches the required 7% of global supply. In none of the previous supply crises was the loss of supplies sufficient to trigger the sharing system-although, in 1979-81, there was a temporary shortage of supplies in Turkey and Sweden.

Alternative response measures were taken involving the use of oil stocks and demand restraint, which were also designed to moderate oil prices that had soared to $40/bbl. These emergency response measures, which sufficed at the time, were subsequently integrated as an alternative to IEP and dubbed, collectively, Coordinated Emergency Response Measures (CERM).

The implementation of CERM during the Persian Gulf crisis was described by one industry observer as IEA's "shining hour." As one former IEA official described it, Steeg needed only to make three phone calls to coordinate U.S., European, and Japanese actions to release 2.5 million bbl of oil from stocks onto the market and cool a suddenly sizzling oil demand.

Known as "the Steig effect" and combined with the "Schwartzkopf effect" (U.S. Army Gen. Norman Schwartzkopf's bombing of Iraqi military installations that might otherwise have targeted other crucial oil fields in the region), prices remained relatively moderate over the next several months, the former IEA official said.

"The IEA's real strength," the former IEA official said, "lies in the network of relations it has built up worldwide."

While Steeg was amused at the "three phone calls" scenario, she did acknowledge that IEA has built up a network of influential contacts around the world-notably former IEA people who go into important jobs when their 3-5 year IEA contracts expire.

France, which had refused to join IEA in 1974 because it wanted no part in what it saw as a confrontation with OPEC-but which had been having second thoughts since 1989-was so impressed with the way IEA handled the Persian Gulf crisis that it no longer hesitated to become a member.

Although the French government is not in full accord with what it considers to be IEA's all-out market liberalization views, Dominique Maillard, general manager of energy within France's Industry Ministry, told OGJ that government sees IEA as "a very efficient and invaluable organization where all energy matters, including nuclear, could be discussed. It also provides France, which has little oil and gas resources, with a 'comforting umbrella' in the event of an oil disturbance."

IEA's membership has increased from the 16 original countries to 24 of the current 29 OECD members, including new entrant Hungary. Mexico, the Czech Republic, and Poland are waiting in the wings.

"But it is not our purpose to have a global membership," Priddle said.

Shaping energy policies

Beyond the energy security umbrella, there is no mechanism for IEA to force its will on countries in order to reshape their energy policies.

While its members are nominally committed through a treaty to apply IEA's recommendations, the governing board has never used coercion.

"IEA countires go along with the recommendations, only because they know the competition is doing the same," explained John V. Mitchell, head of the Energy and Environment Program within the London-based Royal Institute of International Affairs.

"The IEA helps decide which measures should be taken and reassures members that everyone is doing the same. For instance, the 2-year country reviews exert moral pressure through an objective analysis on what a country is doing.

"There are no enforcement measures. In fact, the IEA is weaker than the whole former GATT (General Agreement on Tariffs and Trade) process. It works through moral pressure and by reassuring governments that they are not at a competitive disadvantage, as everyone is doing the same."

IEA Executive Director Robert Priddle
IEA's role has, indeed, changed, but not our purpose, which is still energy security. We are not an environmental organization, and member states can look to the IEA to keep matters in balance-a difficult balance to maintain, but I believe we can achieve it.