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OECD Energy Diversification Changes Largely Reliant on Gas Uptake: IMF

March 31, 2011

Improvements in energy diversification for OECD nations – a key determinant of energy security – are mostly attributable to the increased importance of natural gas as an energy source, a recent IMF working paper reveals.

The research department working paper, published in February 2011 (before the unfolding developments in the Middle East have played out), Measuring Energy Security: Trends in the Diversification of Oil and Natural Gas Supplies’, plots changes in energy diversification for OECD nations for oil and gas, adjusted for country size, distance to supply sources, and political risk.  There is signficant spread in the extent of energy diversification across the countries surveyed.  The United States actually rates very well relative to other OECD countries on the combined oil and gas diversification index – despite public perception.

Source: IMF

Other important aspects of energy security are identified for a next phase of research, including demand-side factors including energy efficiency and demand response, but also likelihood of supply shock and extent of macroeconomic impact through factors such as labour market rigidities and central bank response.  In addition, delving deeper into aspects of non-fossil fuel diversification, and supplier characteristics such as supply infrastructure and prospects for future production as indicators of supply/diversification risk will be analysed. 

These latter points are particularly pertinent given the obvious risks to supply that have become more evident recently in the Middle East, and in view of the discord among analysts of the structural capacity for suppliers to respond to market conditions.

The nuclear accident in Japan and instability in the Middle East has forced a re-assessment of perspectives of energy security and risk.  Recent events combined with forecasts of continued robust non-OECD growth means that all major economies will now be scrambling to make up lost ground to enhance diversification and security as a cornerstone of economic and foreign security policy. 

While, in their introduction, the authors note the continued ability of oil prices to negatively impact economic growth, they also stress improved governance response since the ’74 oil crisis.  What is not contemplated is how ever-increasing tightness in oil markets and competition for energy may have non-linear influences on energy prices and the extent and frequency of political volatility and their knock-on effects.

Future work on energy diversification proposed by the IMF research department and others will prove valuable inputs to national energy planning. 

Perhaps they should add the BRICs to their next phase of analysis.

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