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The energy exception: the challenge of establishing international energy trading norms
Angel de la Vega Navarro

Energy is of fundamental importance to national and international economies. Yet it is often neglected at the level of international institutions, and international trading norms do not apply to the energy sector. The international community, at least economically, has suffered from a lack of cooperation between energy-consuming and energy-producing countries. As such, the establishment of international energy trading norms is of fundamental importance. However, unlike other commodities, fossil fuels and energy are unique. Geopolitical, environmental and strategic factors all contribute to the difficulty of applying free market trading norms to the energy sector. As energy crises from the 1970s onwards demonstrate, however, dangers also lie in persisting with approaches heavily dependent on state and inter-governmental intervention. International energy trading norms must therefore try to balance these two positions, and develop a nuanced structure that is not rigidly embedded within a single dogma.

Where are we today? Free trade and the reemergence of protectionism
According to many specialists, international energy trading norms should be centred on the construction of a competitive global energy market. Government intervention should be confined to limited forms of regulation to ensure transparency in the trading system. This market would determine prices, direct investment to the renewable energy sector, reduce expensive strategic reserves, maintain commercial stocks at adequate levels and reduce politically-motivated price volatility.

In principle, free-trade norms already apply to the energy sector; for example, energy products are not exempt from WTO rules. However, the WTO's efforts are mainly focused on import barriers, whereas trade restrictions in the energy sector are most often export barriers. Energy has therefore always represented a de facto exception to the proliferation of free-trade multilateralism that has increasingly characterized international trade, particularly since the 1980s.

Worldwide, various countries and regions treat energy in a similar, heavily-regulated manner. For example, in the European Union, despite directives in favour of the liberalisation of electricity (in 1996) and gas (in 1998), no consensus has yet emerged on yielding full responsibility for energy supply to market dynamics. Publicly administered markets, dominated by large national enterprises and regulated prices, prevail. New players are often obstructed from joining these markets. The only exception, perhaps, is Great Britain.

In North America, the US has consistently pushed for a "continental energy policy" that would include the free movement of energy goods and services, and unrestricted access to resources. Rhetoric aside, the US consistently pressures its energy partners, enforcing restrictions such as import barriers on "alternative" fossil fuels like oilsands. If energy trade between the US and Canada is largely driven by market and private enterprise strategies, there are also interconnected infrastructures that have created an energy symbiosis, both in economic and physical terms, between these two countries. A former Canadian ambassador in Mexico summarized recent difficulties with the Canadian energy sector as follows: "to integrate free trade in the energy sector is a very delicate question".

Even in South America, which became a laboratory for free-market fundamentalism in the 1990s, recent financial and economic trends have shifted towards state intervention and economic nationalism, including within the energy sector. This has taken multiple dimensions, including price controls, revision of fiscal regimes and contracts, and the possibility of cancelling current international dispute settlement mechanisms such as the International Centre for Settlement of Investment Disputes. New terms, such as "resource nationalism" and "full oil sovereignty" are increasingly prevalent in discussions on energy. The increasing usage of these terms reflects the new reality of heavy regulation and state ownership of fossil fuel resources.

Why is energy an exception?
A number of factors contribute to the unique nature of energy as a commodity. Currently, fossil fuels provide an overwhelming majority of the world's energy. But it is widely understood that they are a finite resource. Recent alarmist newspaper headlines mention "peak oil" and "resource depletion". Given the importance of energy to modern economies, the fear engendered by increasing resource scarcity leads important actors to take measures to ensure access to energy supplies. These actions can often aggravate international relations. Energy is already a cause of diplomatic friction in places such as the East China Sea and the Arctic. Further exacerbation of geopolitical conflict is likely, especially since many experts posit a 50% rise in energy demand by 2035, with fossil fuels having to meet more than 80% of this increase.

The continued importance of fossil fuels to satiate the rising demand of consumer countries is mirrored by the significance of these resources to energy exporting countries. These states consider energy an important tool for development. Consequently, they often take measures contrary to free-market and WTO principles. OPEC actions consist of quantitative export restrictions and ensure income from natural resources by leading to higher prices. This often results in the adoption of dual-pricing practices through which rich countries pay the "real" price of oil while poorer ones utilise subsidies.

The exceptional nature of energy is also increasing as a result of rising environmental concerns. Governments, faced with obligations to reduce emissions, are currently taking actions such as subsidisation and green energy taxation that are contrary to international trading norms and the WTO process. Other measures to reduce the harmful environmental impact of conventional sources of energy have also emerged. These have led to the creation of new global markets, such as the carbon trading (emissions trading and trading in project based credits) market.

For these reasons and more, free trade has never taken root in the energy sector. Instead, energy has consistently been subject to heavy regulation and persistent state intervention. However, these norms are not a suitable framework around which international energy trade should be conducted, as is demonstrated by the politicised use of energy exports by certain countries.

Forging a new path
During the 1990s explicit policies modified the "mix between authority and market" (Susan Strange) by proposing a universal adoption of the market as a mechanism of coordination with precedence even over states. In today's world economy, markets prevail. This evolution implies a radical change for the role of the state and international institutions. The US position has been to favour market action, and advocate removing most regulatory prerogatives from states and international organisations.

But energy remains unique. With political, environmental and geopolitical implications, the energy sector cannot merely be seen as a field for economic transactions. For this reason, free-market norms have not characterised international energy trade. Although some market liberalisation would be beneficial, trade in energy must be tempered by norms of regulation at various governance levels.

Rather than adhering to either extreme, international energy trading norms should be based on a middle way, avoiding the impossibility of total free trade, but also steering clear of the dangers of unilateral state or regional intervention. The Kyoto carbon trading market offers a tentative example of just such a middle way. The Kyoto approach administers public environmental goods through market mechanisms and through the emergence of new forms of property rights.

Interestingly, this method first began in the US, where governments, academics, environmentalists, UN agencies and corporations worked together to develop a market approach to climate change mitigation. A lesson from this experience is that, where needed, the organisation of a market requires the intervention of states and multiple actors, combined with complementary measures at various governance levels. The EU Emissions Trading Scheme (2005) is a good example of this: it has emerged, in part, as a result of broad support from non-governmental organisations. The scheme represents a possible transcendence of the ongoing debate between regulatory and control measures as opposed to market-oriented instruments.

A global energy market would require exactly this sort of complex mixture of intervention and regulation by various actors and at various governance levels. The creation of new organisations such as the International Energy Forum, which is in charge of promoting a global dialogue on energy, is therefore particularly promising.

One possible means through which such a system could be developed consists of establishing an interface between Opec and the WTO. The former operates on grounds contrary to the principles of free trade, and a free market in energy would necessarily entail its dissolution. Despite the inherent contradictions between the WTO and Opec, however, both organisations are indispensable. Opec has a pivotal role in the regulation of petroleum supplies and prices and the WTO is an organisation that remains the centre of gravity of the multilateral trade regime.

The issue of whether energy can be integrated into the multilateral trading system by building a connection between Opec and the WTO has never seriously been considered, but there is some interesting literature and research that reflects on this pertinent question. Areas of tension include Opec's concern with high internal taxes on petroleum products, the development of renewable sources of energy by consumer countries, market access of downstream products, and access to the energy service markets of WTO members. Meanwhile, the WTO is concerned with Opec's quantitative export restrictions, procurement in the energy sector, and export taxes. However, there exist a number of convergence points between the two organisations, including agreement on the importance of investments to build energy transportation networks and to expand production capacities. In particular, Opec approves "a fair agreement" that recognises owners' rights to a just price for their renewable resources and reassurance of their sovereign right to control their natural resources and also consumer rights to a guaranteed energy supply at reasonable prices. Likewise, leading powers in the multilateral trading system, including the US and the EU, use similar terminology in calling for a strengthening of trade alliances and the establishment of dialogue with major energy exporters. The WTO has the potential to address both groups of concerns.

Despite this potential, two important issues would first need to be addressed. The first relates to the status of the WTO as a member-driven organisation. Its negotiation agenda and scope are controlled by member countries. As such, there is no guarantee that there will be a consensus in favour of incorporating energy in the multilateral norm. It would first be important to develop such a consensus. Second, three important Opec members, Iraq, Iran and Libya, which are among the largest producers and exporters of energy, are not WTO members. Indeed, the US has blocked Iran and Libya's applications to the WTO. Political tensions would need to diminish before the WTO and Opec could effectively negotiate to form a new framework.

Due to the exceptional nature of energy, certain states and even international organisations are likely to desire margins of manoeuvre, for instance to define the rules on which market activities should take place. At the international level, however, some states are-whether in the relational or structural sense-more powerful than others. Markets are not purely economic constructs, they are predominantly social structures; they therefore reflect the distribution of power in the international system. Powerful states can thus intervene or impose rules to make those markets work for their own benefit. For these countries, namely the US, energy is often perceived as essential for their national security thereby hindering new energy trading initiatives. Recent claims that international economic power is shifting towards resource-rich developing countries are also an exaggeration. Energy-exporting countries must accept the fact that new issues, like climate change, will influence energy trade and actors' strategies. The international energy scene is changing. Rather than resist or be left aside in the process, resource-rich energy exporting countries have to become active and constructive partners. They need to join the debate on new challenges such as climate change mitigation and try to influence the formulation and implementation of policies worldwide.

ANGEL DE LA VEGA NAVARRO is professor at the Graduate Department of Economics at the National Autonomous University of Mexico.