Using energy security indicators to hedge against energy risks

Abstract

Energy is indispensable for economic growth and productivity, it is a key factor in the functioning of any modern economy. Energy is the necessary power needed for the operation in all sector of the economy, for example, fuel and electricity is required in transportation, heating and lighting, fuel and electricity is required for the production of goods and services, etc... However, these sources of energy are not always available and their supply can be disrupted for many reasons. To ensure long and short-term energy security, many countries and entities are striving to mitigate any disruption and the risks associated with uncertainty to access reliable, affordable, and clean energy sources. Moreover, our interconnected economy and dependence on energy in all sectors make us more vulnerable to geopolitical crises and energy interference. This has stressed the need for a proper, efficient, and effective measure to reduce the risk exposure and energy crises. An example of energy insecurity is clearly illustrated by the Russian & Ukrainian crises, where the military intervention has created a geopolitical conflict leading to sanctions and the disruption of the energy supply. Therefore, the use of energy risk indicators as hedging strategies can help to minimize not only the financial risks caused by energy price fluctuations for energy-intensive industries but also assist in enhancing risk management and financial success for both countries and entities. This article presents energy security indicators in the context of mitigating energy risks at both the national and entity levels. It begins by introducing and describing energy, energy risk, and energy security indicators, then analyse each indicator based on its characteristic and ability to prevent energy supply disruptions and to cope with such disruptions, and lastly compare the energy security of some industrialized countries base on the selected security indicator data collected.