ENERGY SECURITY: LIBERALIZATION, ENVIRONMENTAL POLICY AND FOREIGN POLICY

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ENERGY SECURITYLIBERALIZATION, ENVIRONMENTAL
POLICY AND FOREIGN POLICY

• ISTITUTO BRUNO LEONI
• MICHAEL C. LYNCH

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TRADITIONAL VIEW

• PETROLEUM IS A SCARCE RESOURCE
• POSSESSION OF OIL POLITICAL AND ECONOMIC POWER
• RELIANCE ON IMPORTED OIL VULNERABILITY
• THE WORLD IS VULNERABLE TO MIDDLE EASTERN
  POSSESSION OF OIL
• WHICH WILL INCREASE SHORTLY (SEE ABOVE)

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THEREFORE

• REDUCE MIDDLE EASTERN OIL USE
• COAL, LNG, NUCLEAR, RUSSIAN GAS
• AGGRESSIVE FOREIGN POLICY
• MAINTAIN GOOD RELATIONS WITH PRODUCERS
• COOPERATION WITH CONSUMERS?
• GOVERNMENT REGULATION
• SURGE CAPACITY
• VOLUNTARY CONSERVATION
• NATIONAL/DOMESTIC OIL COMPANIES

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BUT RESOURCE SCARCITY NOT A REAL ISSUE

• FEARS BEGAN 2500 YEARS AGO
• STILL WAITING
• PEAK OIL IS BAD SCIENCE
• WARNINGS HAVE BEEN REPEATEDLY EXAGGERATED
• MALTHUSIAN BIAS
• PRODUCERS VULNERABLE TOO
• DEMAND SECURITY

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OPEC MARKET SHARE FORECASTS (1996)
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THE OPTIMISTIC IEAS FORECASTS FOR OECD OIL
PRODUCTION
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PEAK OIL/SCARCE RESOURCES

• PEAK OIL IS IMMINENT
• (OR ALREADY PAST)
• DUE TO GEOLOGICAL SCARCITY
• CANT BE ALTERED BY TECHNOLOGY OR INVESTMENT
• PRICES/RECESSION MUST CUT DEMAND IN RESPONSE
• IMPACT IS SEVERE
• GLOBAL RECESSION
• ENERGY PRODUCERS POWER GROWS

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LAHERRERE FORECAST FOR UK
Curve seems to fit perfectly, but estimate of
current production is about 60 too low.
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CAMPBELL DISCOVERED (2005) VS URR (1997)
Campbell has found that more than half of all
countries studied have, by 2005, found more oil
than he thought they ever would in his 1997
analysis.
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CAN GOVERNMENTS HELP?

• FIGHTING THE LAST WAR
• POOR ANALYSIS
• SPECIAL INTERESTS
• COAL, ETHANOL, ETC.
• PERCEPTIONS SET POLICY, NOT REALITY

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YOURE IN GOOD HANDS

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OUR HERO!
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FIGHTING THE LAST WAR

• 1951 BUILD REFINERIES
• 1956 BUILD SUPER TANKERS
• 1967 EMBARGO WONT WORK
• 1973 FIGHT EMBARGO WITH SHARING
• 1979 BUILD SPR
• 1990 DONT USE SPR
• 2003/2007 MORE GOVERNMENT INTERVERTION IN
  MARKETS!

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FOREIGN POLICY TO THE RESCUE!

• HAVE GOOD RELATIONS WITH PRODUCING COUNTRIES
• GAIN ACCESS TO SUPPLY
• DIPLOMATS OFFER SPECIAL DEALS
• SOLVE ARAB-ISRAELI CONFLICT
• PREVENT GLOBAL WARMING
• PROTECT ITALIAN CHEESES

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US IMPORTS OF SAUDI OIL
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MARKET SHARE BY COMPANY
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ENERGY SECURITY DEBATEPOLI SCI VS ECONOMICS

• GEOPOLITICAL VIEW
• VOLUMEVULNERABILITY
• DANGER IS PHYSICAL SHORTAGE
• ECONOMISTS VIEW
• MARKETS RESOLVE DISRUPTIONS
• FUNGIBILITY
• BOTH PARTLY RIGHT
• BUT BOTH SEE NO CRISIS IN 1973/79

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REAL PROBLEMS

• DISRUPTION PRICE ASSUMED LONG-TERM EQUILIBRIUM
• OPEC LISTENS TO THE ECONOMISTS
• MARKET NOT COMPLETELY FUNGIBLE
• MARKET CLEARS THROUGH PRICE MECHANISM
• HOARDING CAN WORSEN PROBLEM
• CATASTROPHIC FAILURE
• HIGHER PRICES YIELD ECONOMIC DAMAGE

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PRICE CHANGE DURING CRISES
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GROSS LOSS OF SUPPLY
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PRODUCTION INCREASES DURING CRISES
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NET SUPPLY CHANGE
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MARKET STRUCTURE

• FLEXIBILITY
• CONTRACTS
• PIPELINES
• SPOT MARKET
• OIL PRICE INDEXING
• INTEGRATION

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WHY NO CRISIS IN 1990?

• UNCERTAINTY LOW
• MILITARY THREAT MINIMAL
• OPEC RESPONDED QUICKLY
• PRIVATE STOCKS HIGH
• SPOT MARKET LARGE
• SPRS AVAILABLE?
• FUTURES MARKET?

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WHY THE CURRENT CRISIS?

• 2.5 MB/D OF LOST SUPPLY IN A TIGHT MARKET
• POTENTIAL THREAT UNUSUALLY LARGE
• RUSSIA, NIGERIA, VENEZUELA NEVER A CONCERN BEFORE
• LOTS OF SPECULATION
• KINDLEBERGERS LESSON

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REGULATION AND ENERGY SECURITY

• COINCIDENCE OF PRESSURE FOR LIBERALIZATION AND
  ENERGY SECURITY AT SAME TIME
• ENERGY SECURITY IS A PUBLIC GOOD
• INTANGIBLE
• GOVERNMENTS PROVIDE PUBLIC GOODS
• THEREFORE, REGULATION IS GOOD!
• (BUT SEE RUSSIAN ENVIRONMENT)

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REGULATIONS VALUE

• INSURANCE/PUBLIC GOOD
• SURGE CAPACITY
• COST/BENEFIT TEST
• FIGHT HOARDING
• BUT GOVERNMENTS HOARD TOO
• NOT ALLOCATION
• NOT PRICE SETTING

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THE ROLE OF LNG

• CHEAP SUBSTITUTE
• BUT ONLY IF PRICED THAT WAY!
• CIF CRUDE EQUIVALENCE DOESNT IMPROVE MATTERS
• IMPROVES COMPETITION
• UNLESS ITS ALL ALGERIAN

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CONCLUSION

• SUPPLY DISRUPTIONS WILL OCCUR
• VULNERABILITY CANT BE ENDED
• NATIONAL MAYBE, GLOBAL NO
• BAD POLICY CAN CREATE LOSSES
• HOARDING
• FOCUS ON VOLUMES INSTEAD OF PRICE
• SURGE CAPACITY IS BEST INSURANCE