Blockchain Can Be A Solution To Energy Security, Oil Politics And Geopolitics

The war of resources has been a continuing one, and any historian that attempts to divorce issues of international relations / geopolitics from the economy and resources does a disservice to their craft. These aspects are conjoined in a terminal way, as we have been taught in the past, and as we see now.

While the modern nation-state has evolved significantly over the course of the 19th and 20th centuries, as evidenced by the moves away from coal and wood for power, to one that uses a mixture of oil / petroleum, along with solar, hydroelectric and nuclear energy to ensure a constant supply for its people, and for continued economic dominance on the worlds stage.

So long as a modern nation state can supply the energy necessary in order to keep itself and its people running and prosperous, they have what we would refer to as ‘Energy Security'. So, while powers of yesteryear would go to war for reasons of ideology or money, the states which we inhabit today would do likewise in the name of energy security.

The Issues We Face With Energy Security Today

So, when it comes to energy that states use, what are the kinds harnessed? Well, according to the International Energy Agency, the types used are extracted and harnessed from seven distinct sources.

In particular, and in varying levels of demand, these energy sources are the following:

  • Primary and Secondary Oil reserves
  • Biofuels / Waste
  • Geothermal, Solar
  • Hydroelectricity
  • Nuclear Energy
  • Natural Gas
  • Coal

According to the same research from the IEA, over the last 26 years thus far, this underlying energy demand has risen continuously. In 1990, the total energy demand stood at a collective 9 million Kilotons of Energy (Ktoe), steadily climbing up to 13.5 million Ktoe as of 2014.

Out of each of these energy sources, the research demonstrated that the contribution of primary and secondary oil is asymmetrically large and continues to grow. Meanwhile, coal, our second largest energy resource remains a commanding and growing source for many developing and developed nations, cementing itself as a dominating force, especially as a conventional energy source.

What makes the matter of energy disparity and security all the more challenging is the fact that the production of energy is concentrated in different jurisdictions and its production, processing, and sale is governed by geopolitics and diplomacy.

Can't think of any examples to this? One of the most straight forward ones are the respective oil-producing states in the Middle East, all of which co-operate with one another in an organization called OPEC. This organization is directly responsible for policies regarding the production quotas, sale prices and which trading partners they have.

Being the single largest collection of oil producers in the world, with a total production value worth two and a half times its energy demands, the nations that make up the OPEC bloc are some of the most energy secure regions in the world.

Energy Security – The Threats

The fragility that stands uncomfortably behind the geopolitics of energy can be seen from the OPEC gas crisis in the 1970s as a result of the United States support of Israel during the Yom Kippur War from 1973-4. The subsequent boycott by OPEC rattled the US economy to the point that, according to historians like Andrew Bacevich, believe it altered America's foreign policy towards an active role in the region.

What this gives the OPEC regions is a political lever over other nations; with the decision to refuse to sell oil to nations, countries from the smallest, to the international superpowers can be arm-twisted into concessions.

The Russian Federation functions in a similar way within the Caucasus regions, having major reserves of oil in that region. As a result of this monopoly, Russia is able to interdict the policies within neighboring states thanks to:

  • Commanding a powerful army which can act under the wishes of a powerful nation-state
  • Due to its control of oil pipelines, Russia can cut off oil for any number of countries, leaving them in a state of energy-based paralysis.

In a reversal to this, Iran, one of the major energy producers, specifically Oil, was (and is awaiting renewed) subject to economic sanctions which pulled Iranian Oil exports down for many buyers. This policy had some major effects:

  • It led to the further radicalization of Iranian youth, making them increasingly susceptible to anti-western indoctrination.
  • It emboldened Islamist militant groups such as the Islamic State to capture and put to use, a mixture of abandoned Syrian and unguarded Iraqi oil fields, serving to fill the oil gap and fund their continued activities.
  • It threatened the continued oil security of nations such as India and Pakistan, both of which relied heavily on Iranian Oil as a cheap energy source for their populations.

So, What's The Solution? Blockchain Technology

Along with understanding (as much as possible) the matters of macro-economics and international relations, it's important to also understand the issues from a micro-economic level. These include the matters of Energy transport, production, processing and delivery. These can be divided up into two processes:

  • Upstream Processes: This pertains to the prospecting and extraction of various energy sources.
  • Downstream Processes: This refers to finally bringing the energy resource to the end-user.

The Upstream Processes are generally more simplified, thanks to the fact that they're generally managed by one, or a small group of companies which standardize and provide a level of uniformity to how these processes are conducted. It's main issue? Extraction efficiency which requires innovation in technology instead of management.

When it comes to the remit of downstream policy, however, this is where it becomes a bit more complicated, due to the fact that are a wider number of actors operating at various capacities and over a fluctuating scope. The management of this supply chain, in particular, from where it begins with the finished product, as it ends up being delivered to the end user is one that is management heavy, expensive, opaque and generally, quite tedious.

Owing to its vast operational scope and lack of a uniform auditable ledger, the Blockchain-fit for the Energy industry lies in downstream processes. While seeming as though there are multiple solutions needed for these limitations to both upstream and downstream processes, it can be demonstrated that a single solution can address these limitations in a transparent, neutral, universal, and consensus-based manner.

For Any Solution To Energy Security To Exist

It Must Be Transparent, Auditable And Actionable

Every party that would otherwise be involved in any actions relative to any stage of energy extraction, production and distribution, must be able to track and measure their shipments in an effective manner. This would also make them immediately auditable for any losses or spillages that may occur.

Have And Require Multi-Signature Transactions

No single party within the system should be able to log and add their own transactions in a unilateral way. They must be signed and approved by multiple parties so as to ensure that they are legitimate.

Have An Open Sales And Purchasing System In Place

Thanks to blockchain technology, this system can use a token system, these would then function as a way of allocating a set amount of energy to the token holder.

It would also allow investors to buy and sell any surplus or deficit energy through cryptocurrency exchanges, apart from the traditional model of sales and purchases being facilitated by middlemen of dubious dispensations.

Having Such A System Would Have A Number Of Benefits

  • It would open up the possibility of having a decentralized exchange for trading energy, this in itself would prevent the damages caused by boycotts and stop any chances of price manipulation from damaging the market.
  • This would open up the marketplace for anyone to buy and sell energy, including working around trading their energy requirements in order to find the best deal.
  • Imbalances in reporting refined fuel consumption can be checked in real-time to enable buyers and sellers to take corrective measures proactively.
  • Malpractices regarding transactions can be avoided through this system. Any and all energy transfers would only take place once the financial arrangements have been mutually agreed upon and made between the two parties. This allows for the respective sides to assess the quality and quantity of the energy being traded.

Energy Security And Cryptocurrencies

One of the things that is being made clear to those proposing the use of blockchain for energy security, especially for those entering the world of crowdfunding their project, it's this: gearing their system towards renewable energy appears to be the way to appeal to the most investors. Is that really any surprise though? Renewable energies are the essential pieces to solving the existential puzzle that is climate change and global warming.

But while there simply is, no denying the encroachment of climate change into our local and global environments, there are countries, developing or otherwise, that must have their energy demands met, and until renewable energies can supplant other sources, such as coal, countries will continue to use them.

While research from the International Energy Agency in 2017, demonstrates that the overall demand for fuel is decreasing steadily, it's not fast enough to warrant a complete move away from these dependable resources. When broken down along the lines of percentile breakdown of energy used, conventional sources take up an incredible 65% of all energy sources used.

Despite the various climate change conventions such as the Kyoto Protocol and the Paris Protocol, this percentage is still a majority.

Within the world of cryptocurrencies, it is become an understood prospect that investors will only make a return once companies (blockchain or otherwise) start coming out with something more tangible, such as some form of a security token. What this means is that the days of utility tokens being on the front of Vogue are long diminishing. In 2018, $8.3 billion was raised by ICOs, an unprecedented amount, and yet, most of them failed miserably post-ICO.

Energy Security: Meet Security Token Offerings

The underlying decline and subsequent failures of ICOs in 2018 has had the knock-on effect of dissuading investors from further investment, rattling their confidence overall, especially when it comes to the durability of utility tokens.

On the other hand, this falling out of favor that utility tokens have had on investors has resulted in the emergence of security tokens, the latter of which has become the more attractive of the two for investors. In the place of Initial Coin Offerings, we're seeing a steady rise in the number of Security Token Offerings (STOs), this is helped by the some of the developments surrounding the US's Securities and Exchange Commission (SEC).

Even though Regulation A+ Exemptions were being afforded to methods of fundraising, there was a highly visible problem with this: you could only raise funds from accredited investors only, significantly limiting the investor pool you could advertise to.

An alternative? This would be Regulation S Exemptions, which would allow companies to raise funds from foreign investors while also selling their tokens on an exchange post a lock-in period. Regulation S is a “safe harbor” that defines when an offering of securities is deemed to be executed in another country and therefore not be subject to the registration requirement under section 5 of the 1933 Act.

There have been countless thousands of Initial Coin Offerings which, along with their thousands of now perpetually dead tokens, that have been dismissed to obscurity due to the fact that the market simply wasn't ready or equipped for them. This has inevitably taught us a valuable lesson: Follow the conventional rules initially, but always be disruptive. This is the lesson that Warren Buffet gives, stating “Watch what everyone else is doing, then invest in the opposite direction.”

This is somewhat true for security tokens, due to the fact that they remain a potentially disruptive force, but they also conform to the current regulatory practices set out by the SEC.

In Conclusion

Albert Einstein once stated that he didn't know with what weapons World War Three would be fought, but the other question should be why that war would be fought. And to some, that is potentially over elements like water. While this is a conversation for disaster theorists, the truth is that the third world war is being fought currently, continually and on a smaller basis than was prophesied.

It's being fought, not over water, but over the continued fears that come with energy security. It's one that is completely decentralized, with no fixed point as a battlefield, along with this it has multiple nodes wherein conflict is ongoing and continuous. What's more, it has a consensus algorithm that attempts to resolve these conflicts, but is growing in dire need of a hard fork (United Nations), and most importantly, is conducted over a distributed network by people with hidden identities.

When it comes to Energy Security, knowing what it is is far easier thank knowing how to resolve it. It is having a readily available, uninterruptible source of power. And while the supply of energy is keeping in front of aggregate demand on an annual basis, its supply chain gets by every year, despite the fact that there are glaring redundancies that are becoming too glaring to ignore.

As a supply chain, both the matters of upstream and downstream processes when it comes to energy security are issues that can be solved through blockchain technology. In moving away from these obstructive private ledgers and onto blockchain, the steadily growing issues of supply and demand, along with the costs of distribution logistics are ones that can be solved.

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