Energy Mercantilism on the March

Just over a year ago I wrote about the New Energy Mercantilism, the set of geopolitical phenomena emerging as nations realize that, in the future, there will not be enough energy to go around to sustain projected demand. A market-economy solves this problem by increasing the price of energy until demand inelasticity is overcome and the energy is allocated to where the market says it is most valuable. Mercantilism, rather than trying to distribute shares of the pie more efficiently, aims to lock down as large a share of the pie as possible for your own needs.

A year later, it is clear that mercantilism is on the march.

Joseph Stroupe has written a fascinating article in Asia Times Online about the rise of energy mercantilism. Specifically, he outlines the mechanism by which nations like China, Russian, and India are embracing the mercantilist approach. All three nations are rapidly moving toward an energy market dominated by long-term, bi-lateral supply contracts. This might not sound like a major change, but consider that today energy is supplied to high-liquidity trading bourses where the person willing to pay the most gets the energy. This is significant for two reasons: 1) it ensures that everyone around the world pays roughly the same price for energy (after transport costs are accounted for), and 2) it reduces the ease for deploying the “oil weapon” through an embargo because such action has very dispersed effect–holding 4 million barrels of Iranian oil per day off the free markets increases the price for everyone, forcing your enemies and allies to bear the diminished effects.

Long-term, bi-lateral supply contracts (where, for example, Angola commits to supply China with 200,000 barrels per day of crude oil at $60/barrel for the next 10 years) fundamentally alter this dynamic. First, by locking in future energy prices (at quantities far higher than can be achieved on the futures exchanges), everyone will not pay the same price for oil in the future. Second, by exiting the open market through such contracts, the precsion-targeting of future oil embargos increases dramatically.

Energy Bulletin