Energy is the elephant in the trade room

Energy trade is a big deal. Globally, around 100 million barrels of crude oil are consumed every day. About 68 percent of crude oil output is traded internationally. Add refined products, natural gas, coal, electricity, and renewables, and energy comprises a major component of global trade flows. Yet the World Trade Organization (WTO) has little to say about the rules for energy trade.

Historically, neither the General Agreement on Tariffs and Trade (GATT) nor the WTO Agreement were considered as having a direct bearing on international energy trade. Trade in hydrocarbons, fissionable materials and cross-border transmission of electricity largely took place outside the multilateral trading system.

Why is this, and is it a problem?

No energy for a trade negotiation

In simple terms, the GATT and WTO negotiating agendas have always been member-driven. Before 1973, no GATT member was a major energy exporter seeking reductions in trade barriers, and therefore bargaining on energy-related goods was never demanded by a member. After 1973, energy trade gained a strategic dimension. While energy exporters began to join the GATT and WTO, the new members were unable to find enough common ground with importers to add the sector to the negotiating agenda.

Another reason why energy trade and GATT/WTO rules operated in isolation from one another was that, for the most part, these agreements contain rules of general application. Neither refers to “energy” or deals specifically with energy matters, although the General Agreement on Trade in Services (GATS) includes market access commitments on various kinds of services relevant to the energy sector.

Major Energy Trade Flows BP Chart

Source: BP Statistical Review of World Energy, June 2018

Shifting oil sands may put energy on the agenda now

Even though structural elements in the energy sector differentiate it from issues involving typical goods and services trade —the most significant being high levels of state ownership — there are two key developments that may lead to convergence between the energy business and the rules of the WTO.

The first is the accession and pending accession of major oil-producing economies to the WTO. Saudi Arabia and Russia are now WTO members and other oil producing economies are waiting in the wings. The accessions of these exporters may well change the dynamics of the WTO as an organization.

The second is climate change. Many experts recognize that progress in reducing greenhouse gases through the United Nations Framework Convention on Climate Change and various national measures will directly engage the application of WTO rules.

Can the WTO promote efficiency in energy markets?

What role can the WTO play in encouraging more efficient management of energy resources? Here is a first-order rationale with an important caveat.

First, open trade in energy goods and services is indispensable for economic progress. This is especially true for meeting the needs of developing countries. Second, to meet economic development objectives, energy markets must be allowed to operate as efficiently as possible. This requires a rules-based system that guarantees the operations of market mechanisms through non-discrimination, regulatory transparency and access to impartial dispute settlement. These rights and obligations are embedded in the WTO system and, because of that, the WTO and the interests of the energy sector may converge.

What’s the caveat? It is critical to recognize that structural factors unique to the energy sector constrain the full application of WTO rules, the most important being that energy resources typically belong to the State and that many countries have structured their petroleum and electricity sectors around state owned enterprises. State ownership and sovereignty interests differentiate energy goods from typical goods and services in international trade.

The GATT/WTO sets out rules prohibiting unjustifiable discrimination, and import and export bans, on trade in all products. Economic development and open, rules-based trade in energy products and services go hand in hand. While global energy trade today follows the “Adam Smith Rule,” it’s possible to forecast a future where rules, arrived at by mutual interest and administered by mutual consent, will be an idea whose time has come.

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Good data sources for additional research:

Global consumption: https://www.eia.gov/outlooks/steo/report/global_oil.php
Exports as a share of oil trade: https://www.bp.com/en/global/corporate/energy-economics/statistical-review-of-world-energy.html