Energy diversification

In order to minimize risk, an investor will diversify their portfolio of investments as a number of different investments is less likely to fail than one large investment. This concept applies to the use of energy as well; relying heavily on one source can leave a country vulnerable to disruptions or shocks in that market.[1]

Energy Diversification

The diversification of a country's energy sources is called its energy mix. Diversification is essential to energy security: the most common energy sources such as crude oil, coal and natural gas are all commodities and are therefore subject to market forces which can result in interruptions to supply or exorbitant price rises. In addition, commodities such as oil are more susceptible to short term shocks resulting from geopolitical events such as conflicts and terrorist attacks. Diversification allows for a society to absorb a shock in one energy input such as coal by increasing the use of another such as nuclear or solar energy for example.[2]

For example, a nation that relies heavily on one source of energy such as electricity form coal is prone to disruptions in that sector. A large shock to the coal supply would result in a shortage of available electricity if there was no other source. A nation such as Canada that has a diverse energy mix of natural gas, coal, hydropower, nuclear and others is much less prone to shortages because it is very unlikely that all of these systems would fail at the same time. In the first example, if a nation had diversified its energy mix then a shortage in electricity from coal means that the nation would rely more on other methods such as hydro or natural gas.

Diversification and Energy Security

Having a diverse energy mix is usually considered an important part of energy security, having multiple sources allows a country to continue without disruption if one source of energy fails.

There are exceptions to this case. Nations that supply themselves with all of the energy they consume can worry less about the security of their energy supply. A country that imports a large amount of energy has to take into account all the factors that can disrupt the supply of energy coming from the exporting country.[3]

Political instability, conflict and diplomatic relations are three of the main factors that importing countries have to worry about. For example, countries that import crude oil from the Middle-east or parts of Africa benefit from relative cheap oil and abundant supply but have to worry about problems that plague these regions. In 1990, Iraq invaded its neighbor Kuwait, as coalition forces fought the Iraqi forces out of Kuwait the Iraqi forces set Kuwaiti oil wells ablaze. The invasion and subsequent destruction of wells almost destroyed Kuwaiti oil production for a period of time. This affected the supply of oil to countries that depended on it and raised the price of oil.[4]

Trinidad & Tobago

The Caribbean island nation of Trinidad & Tobago does not have a diverse energy supply, their TPES consists of 72.3% natural gas and 27.7% crude oil. Normally energy sources such as natural gas and oil are subject to fluctuating market forces and if imported the importing country has to worry about the conditions of the exporting regions. Trinidad & Tobago produce nearly all of their own energy, 86.2% natural gas and 13.8% crude oil and use their natural gas to generate 99.7% of their electricity.

While the energy mix of Trinidad & Tobago is not diverse it is secure. So, while diversification generally leads to more security, there are some exceptions.

In contrast, Japan (2013) imports nearly all of its crude oil, natural gas and coal. Japan does not produce these sources domestically and has to rely on others places for the supply. This means that Japans energy mix is diverse but less secure than that of Trinidad & Tobago.

Transportation and Electricity

The diversification of energy mixes in most countries is limited by the need for transportation energy. While many countries are able to diversify their energy mixes, gasoline is the mainstay fuel of nearly every country for transportation. This limits the ability of a country to diversify it transportation fuel mix.

For example, if electric cars were to become more prominent, the energy mix for transportation fuels would be split between gasoline and electricity. Furthermore, if natural gas vehicles came into wide use the mix would be further split between the three sources and would be more diverse.

In the data visualization below, click on different countries to see what the energy mix looks like. Be aware that some countries (like Canada, or OPEC countries like Kuwait) export energy (like electricity or gasoline), which shows up as a negative amount on the line chart.

References

  1. J.Black, N. Hashimzade, and G. Myles. (2009) "Diversification." [Online], Available: http://www.oxfordreference.com/view/10.1093/acref/9780199237043.001.0001/acref-9780199237043-e-864?rskey=phC3Nh&result=1, 2009 [June 28, 2016]
  2. D. Yergin. Ensuring Energy Security. [Online], Available: https://www.foreignaffairs.org/articles/2006-03-01/ensuring-energy-security, Mar./Apr. 2006 [June 1 2016].
  3. D. Yergin. Ensuring Energy Security. [Online], Available: https://www.foreignaffairs.org/articles/2006-03-01/ensuring-energy-security, Mar./Apr. 2006 [June 1 2016].
  4. L. Maugeri. The Age of Oil: The Mythology, History, and Future of the World's Most Controversial Resource. Westport: Praeger, 2006, pp. 146-147.

Authors and Editors

Lyndon G., Jordan Hanania, Jason Donev
Last updated: September 17, 2016
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