Beyond the Resource Curse

10. Energy Exporters and the International Energy Agency

10 Energy Exporters and the International Energy Agency Richard Jones The International Energy Agency (IEA) was established in 1974. The creation of the IEA followed the 1973–74 oil crisis and was a firm and effective response to this challenge. At its establishment, the IEA encompassed the major oil-importing states and aimed to limit oil exporters’ potential economic and political power. In the years since that crisis, the IEA has protected the interests of energy importers. IEA member states and other oil importers have taken a number of steps that provide them with important counterweights to exporters’ ability to disrupt energy markets. One of the most effective measures at the organization ’s disposal is strategic stocks of oil. These reserves have limited oil importers’ potential vulnerability to supply disruptions and thus undermine exporters’ potential power. In contrast to the prevailing perceptions of the 1970s, energy exporters possess limited international economic and political leverage for a number of reasons. First, energy exporters’ longer-term interests ultimately depend on the economic prosperity of their customers. This became obvious in the early 1980s when recession in the West hit oil demand and undermined energy prices just as alternative energy sources began to come on stream, further contributing to the reduction of long-term demand for oil. Second, many oil producers recognize they share common interests with oil consumers, such as stable energy markets and investment in new production, and do not 284 Richard Jones want to use their energy wealth to promote political goals and thus endanger cooperation with consumers. Many today have significant economic and financial investments in consuming countries. Third, producers are not a united bloc. Today, more than 60 percent of global oil production comes from states that are not members of OPEC. Even OPEC itself is far from a united entity, as its member states possess very different priorities. Some states, such as Iran and Venezuela, have large populations and a short-term need for higher revenues, yet others take a longer view. Next, most OPEC members recognize that extended high oil prices lead to investments in other forms of energy—coal, gas, nuclear, and renewable energy—that can lead to a permanent reduction in the demand for oil. Thus, extended high oil prices serve as a peril for both exporters and importers of oil. Last, energy exporters worry about “security of demand,” especially when faced with concerns about global climate change policies. Many of them realize that they will not obtain continued investment or increased global demand for oil solely by coordinating with other producers. Cooperation between energy exporters and importers can lead to an improved situation for both sides. The Founding of the IEA The full-scale energy crisis in autumn 1973 and the perceived threat from OPEC led importing countries to form the International Energy Agency, which undertook the task of ensuring the energy security of oil-importing nations. According to the treaty that led to its founding, the IEA has executive authority to handle major oil supply emergencies. Subsequently, in contrast to the crisis atmosphere of the 1970s, oil exporters have come to understand that the degree to which they can achieve political ends by disrupting oil supply is limited. OPEC was established in 1960 by five founding members—Iran, Iraq, Kuwait, Saudi Arabia, and Venezuela—to protect energy exporters’ interests in what was still a buyers’ market. These countries understood they needed to maximize returns on their depleting asset and develop their economies. At the same time, they recognized that they also had an interest in preserving stable energy markets and economic growth among oil-importing countries. Consumers were dependent on their oil, but OPEC members had become equally dependent on the revenue oil exports generated for them. At that Energy Exporters and the International Energy Agency 285 time, oil dominated international energy trade, and OPEC countries dominated trade in oil. By the mid-1970s, OPEC had expanded to include Algeria , Ecuador, Gabon, Indonesia, Libya, Nigeria, Qatar, and the United Arab Emirates, and the organization’s members exported more than 70 percent of all internationally traded oil. The selective oil embargo imposed by the Organization of Arab Petroleum Exporting Countries (OAPEC) at the height of the October 1973 Arab-Israeli War presented oil-importing nations with a problem they quickly realized they did not have the institutional structures to handle. So it is not surprising that the IEA was set up...