[NSP Report 48] International Energy Governance After the Global Financial Crisis

Professor, School of International Studies, Korea University. Professor Lee Jae-seung graduated from Seoul National University with a degree in Political Science and earned a Ph.D. in Political Science from Yale University. He served as a visiting research fellow at the Korea Institute for International Economic Policy (KIEP) and an assistant professor at the Institute of Foreign Affairs and National Security. He is currently the Vice President of the Ilmin Institute of International Relations and the Director of the Center for Energy, Resources, and Environment at the Korea University Institute for Sustainable Development. His major works on energy include Energy Conservation in East Asia: Toward Greater Energy Security (2010, co-authored), "EU's Green Energy Strategy: The Policy Responses to Renewable Energy and Climate Change (Journal of International Politics, 2010)," “Energy Security and Cooperation in Northeast Asia" (Korea Journal of Defense Analysis, 2010), and “Reconsideration of South Korea's Energy Policy Paradigm: Focusing on Overseas Resource Development and Green Growth” (Journal of International Relations, 2009).

I. Introduction

1. The Global Financial Crisis and International Energy Relations

The global financial crisis of 2008 temporarily reversed the trend of increasing fossil fuel consumption. The decrease in global oil demand was the first such occurrence since 1993 (Ruhr 2010). International oil prices, which had exceeded $140 per barrel in the summer of 2008, plummeted to the $40 range by the end of that year, and have recently recovered to the $80 range. International oil prices are expected to rise again in the medium to long term with economic recovery. In particular, the financial crisis has contracted energy investment by reducing final energy demand and cash liquidity, which may act as a burden in the medium to long term. [Figure 1] shows the recent sharp fluctuations in international oil prices.

[Figure 1] Trend of International Oil Prices (2000-2010, Unit: $)

Source: EIA Statistics 2010

Meanwhile, the financial crisis provided an opportunity to introduce new energy policy directions through a shift in political priorities. While the financial crisis itself cannot be directly attributed to rising energy prices, it is clear that it marked a turning point in the international energy order by providing time to explore new strategies for future energy supply and demand models amidst reduced energy demand and a sharp decline in prices from their peak. It was also during this period that a policy paradigm shift occurred, emphasizing clean energy systems, including new and renewable energy, due to growing concerns about sustained high oil prices and the depletion of fossil fuels. The fact that countries like the United States and South Korea announced job creation and economic recovery through green growth as solutions to overcome the financial crisis is not unrelated to this trend.

2. The Nature of Energy Issues

As energy resources have become not only commodities traded on the international market but also crucial strategic assets, strategic considerations for energy security have led to the formation of state-centric international relations beyond private actors. In particular, state-owned enterprises in major energy-producing countries possess absolute reserves of existing and unexploited oil fields, which they manage at the national level. Importing countries also consider the stable supply of major energy sources as a vital national interest and address supply and demand issues from the perspective of energy security.

Thus, energy issues involve a complex interplay of security, market, high politics, and low politics elements, exhibiting a multi-layered nature (Lee Jae-seung 2005). In energy relations, security and economic relations are often closely intertwined, and the dynamics among participating actors reflect a combination of these two factors. Both political determinism and economic determinism have limitations in clearly elucidating the nature of these complex international energy issues; therefore, international energy relations need to be approached from a multi-layered, diversified perspective, considering specific issues and actors.

3. Problem Statement and Research Structure

Under a state-centric energy system, existing international energy cooperation has not achieved significant results, particularly in cooperation among consumer countries and between producers and consumers. This study seeks to answer why international energy cooperation among consumers and between producers and consumers has been unsuccessful in its characteristics of international energy governance. To this end, it examines factors such as the market structure dimension, including the persistence of a low oil price regime after the oil shocks of the 1970s; the pursuit of energy security strategies prioritizing national interests (e.g., realist and mercantilist approaches); and the absence of leadership and governance in international energy relations. Through this, the conditions and possibilities for international energy cooperation can be more clearly illuminated. In particular, this study emphasizes the creation of public goods (e.g., transaction costs, legal and institutional frameworks) and the formation of governance as conditions for such cooperation.

Furthermore, this study examines whether the new green energy trends and policies emerging after the global financial crisis can indeed create new energy governance. This aims to concretize the future landscape of international energy governance by reconstructing the discussion on optimistic green energy cooperation, which is largely based on normative arguments, from a more realistic perspective.

II. International Energy Supply and Demand Outlook and the Challenges to Energy Security

1. International Energy Supply and Demand Outlook

According to projections by the International Energy Agency (IEA), global energy demand is expected to continue increasing until 2030. Global primary energy demand is projected to rise by approximately 40% between 2007 and 2030, at an average annual rate of 1.5% (IEA 2009a). Demand growth in developing countries in Asia, particularly China and India, will be the primary driver of this increase, followed by the Middle East. The industrialization and urbanization in these countries are accompanied by a rapid increase in energy demand, and they also possess structural vulnerabilities due to inefficient energy management and various subsidies. The current instability in the energy market stems not only from supply uncertainties but also from the mismatch between increasing demand, particularly from emerging developing countries, and existing supply levels, which presents significant uncertainty for energy policymakers.

According to the International Energy Agency's (IEA) reference scenario, fossil fuels are expected to remain the primary energy source, accounting for over 75% of the energy increase between 2007 and 2030. Although oil's share in the energy mix is projected to decrease from 34% to 30% by 2030, it will still be the most significant energy source, with consumption growth particularly pronounced in non-Organization for Economic Cooperation and Development (OECD) countries. While production from conventional gas fields is declining, the discovery of unconventional gas, such as shale gas in the United States, is increasing supply. Although the supply structure for gas may be less competitive than for oil, global demand is expected to continue to rise (IEA 2009a).

Demand for gas and coal is expected to increase continuously, especially in the power generation sector. Renewable energy is also projected to grow rapidly, with the share of non-hydro renewable energy in power generation increasing from 2.5% in 2007 to 8.6% in 2030. Electricity generation from renewable energy, nuclear power, and facilities with carbon capture and storage is expected to account for approximately 60% of total electricity generation, nearly double the current figure. While the proportion of renewable energy in the overall energy mix will increase, the reference scenario predicts that fossil fuels will still account for an overwhelming 87% by 2030. This proportion is expected to change somewhat in the alternative scenario (450 Scenario), which assumes greenhouse gas reductions, with a relative increase in the share of renewable energy sources and a decrease in the share of fossil fuels; however, the absolute composition is not expected to change significantly. [Figures 2, 3, and 4] illustrate these international energy supply and demand projections... (continued)