One world, two systems?
In this issue, covering again quite well the global developments of the international energy-community at several
levels, there is one overriding issue that has greater consequences for the energy-industry the coming decades, and
that is the issue of how energy is being traded.
In the last decades, large parts of the global energy trade have taken place on the principles of the so-called “free-market”, based on the prices and ways of trading of NYMEX & Co, providing a great flexibility of choice for the consumer (and producer) in where they buy (or sell) quantities of oil (and increasingly also gas) from (or to) whom. The system has worked quite well for quite some years. but is ever more been hampered by an excess in “freedom” that expresses itself in the increasing role of speculators, ever more derivatives, and therefore increasing non-transparency, and suspected influence-taking of governments and other third parties.
Since a few years, we see a rising usage of more bi-lateral price-setting, contracts made directly between the producing- and the consuming country and their governments or leaders. And although the price-setting is often indirectly related to the free-market, the great advantage of the bi-lateral system is a greater security and reliability, and much less volatility.
With the current changes in the political systems in quite some places in the world and a greater influence-taking of governments in the development and exploitation of resources, we can also see a change of balance in the system that is being used and can see a movement of price-setting that starts to have more bi-lateral elements in it, rather than letting the price of the resources be determined by the current quite “concentrated” free market.
All this is fine as long as both parties agree on the system that is being used and are able and willing to adhere to it. When however, there is no agreement on what system to use and both parties want to superimpose their system upon the other, friction occurs and sparks are flying and flames erupting, with all the subsequent verbal flaring that can be brought to bear to try to influence the matter, as we can see since some time in Europe in its dealing with Russia.
We need to realise that the times have changed and are changing ever faster and that a system that has worked well
for decades within a fractious market may be loosing its attractiveness because of the “side-effects”
that have developed over time and that the “free market”, as we still think it is, is not free at all
because of the concentration of resources that has taken place over the years.
We can see that the “government” of the free market, not dissimilar to the more government-related
bi-lateral system, is in the hands of just a few parties, albeit that the principles from which this is being
“governed” is very different.
So in a changing market, we may expect that verbal sparks will be flying with some intensity for some time, by the different parties or even from good-meaning “friends”, but that an upgrade of both systems is needed to adapt to the reality of mutual interdependence and, in the long term, a decreasing availability.
Stay neutral if you can.
Alexander
Comments are always welcome at alexander@gas-oil-power.com
