Security of Supply

1
Security of Supply

• When is it a Problem and What to do about it?
• James M. Griffin
• George Bush School of Government
• Texas A M University

2
What kinds of goods pose legitimate public policy
concerns?

• Key Characteristics
• Goods whose disruption would trigger a large
  price spike resulting either in a
• Macroeconomic upheaval
• Military consequences
• Goods subject to supply disruptions
• Natural disasters e.g. hurricanes, droughts
• Internal political instability
• Regional wars
• Embargos
• 
  

3
Simple Test

• Orange Juice
• freeze?price doubles ?substitution to other
  drinks ? no macro/military consequence
• Oil
• Disruption in Middle East ? price doubles ?No
  short term substitutes ? severe recession

4
If Passes the Test What Next?

• Whats the geographical scope of the market and
  how efficient is it?
• Is market one big bath tub? Or
• Security becomes a world wide problem
• A series of wash basins?
• Security is a regional/country problem with very
  different policy prescriptions?

5
A Series of Wash Basins
6
Policy Prescriptions for Wash Basin

• Traditional remedies Radetzki discusses
• Bilateral deals with secure sources
• Preferably long-term enforceable contracts
• More sources/more contracts the better
• Send state-owned companies out to lock-up
  supplies for domestic consumption
• e.g. Chinese Oil Companies
• Autarkyself sufficiency if not unreasonably
  expensive
• Strategic Stockpiles if goods are storable

7
Bath Tub Analogy
8
Why is World Oil Market One Big Bath Tub?

• Oil is fungible
• Oil tankers offer low cost worldwide
  transportation
• No one producing or consuming country can control
  market

9
Price of Crude Oil by Type, 1997-2007
10
Keys to Oil Security in the Bath Tub

• More independent faucets into tub diminishes
  probability of big disruption
• Strategic Petroleum reserveanother faucet
• Reduced worldwide dependency on oil cooperation
  problem
• Reliance on free markets during disruptions

11
2. Strategic Petroleum Reserve another faucet

• Incentive compatible--By selling during emergency
  can recoup part of costs of reserve
• 1.4 billion barrels
• Offset lost production for substantial periods
• 2 mmb/d for 700 days
• 3 mmb/d for 465 days
• 10 mmb/d for 140 days

12
3. Reduced Consumption from Bath Tub

• Joint actions to reduce oil consumption
  diminishes importance of ME
• If oil/GDP is reduced, oil price shocks will have
  less impact
• To be effective, need joint effort problem of
  public goods/free rider
• EU Japan already demonstrated willingness to
  conserveneed U.S., China to join

13
4. Are Market Forces and Globalization Allies?

• Market provides built-in incentives to hold
  emergency supplies
• Worldwide price shocks induce conservation
  worldwide, spreading the adjustment
• Firms and consumers have remarkable ability to
  adapt in emergencies
• Must avoid Price Controlslesson from US in the
  1970s

14
(No Transcript)
15
Conclusions

• Under the guise of Security much economic
  mischief has been done
• e.g. Autarky, unnecessary international political
  tensions
• Make sure there is a real justification
• Is it a Wash Basin or a Bath Tub?
• If its a Bath Tub think about world, not
  national security