ENERGY SECURITY: LIBERALIZATION, ENVIRONMENTAL POLICY AND FOREIGN POLICY ISTITUTO BRUNO LEONI MICHAEL C. LYNCH

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)

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

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

OPEC MARKET SHARE FORECASTS (1996)

THE “OPTIMISTIC” IEA’S FORECASTS FOR OECD OIL PRODUCTION

PEAK OIL/SCARCE RESOURCES PEAK OIL IS IMMINENT (OR ALREADY PAST) DUE TO GEOLOGICAL SCARCITY CAN’T BE ALTERED BY TECHNOLOGY OR INVESTMENT PRICES/RECESSION MUST CUT DEMAND IN RESPONSE IMPACT IS SEVERE GLOBAL RECESSION ENERGY PRODUCERS’ POWER GROWS

LAHERRERE FORECAST FOR UK Curve seems to fit perfectly, but estimate of current production is about 60% too low.

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.

CAN GOVERNMENTS HELP? FIGHTING THE LAST WAR POOR ANALYSIS SPECIAL INTERESTS COAL, ETHANOL, ETC. PERCEPTIONS SET POLICY, NOT REALITY

YOU’RE IN GOOD HANDS…

…OUR HERO!

FIGHTING THE LAST WAR 1951: BUILD REFINERIES 1956: BUILD SUPER TANKERS 1967: EMBARGO WON’T WORK 1973: FIGHT EMBARGO WITH SHARING 1979: BUILD SPR 1990: DON’T USE SPR 2003/2007: MORE GOVERNMENT INTERVERTION IN MARKETS!

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

US IMPORTS OF SAUDI OIL

MARKET SHARE BY COMPANY

ENERGY SECURITY DEBATE: POLI SCI VS ECONOMICS GEOPOLITICAL VIEW VOLUME=VULNERABILITY DANGER IS PHYSICAL SHORTAGE ECONOMISTS’ VIEW MARKETS RESOLVE DISRUPTIONS FUNGIBILITY BOTH PARTLY RIGHT BUT BOTH SEE NO CRISIS IN 1973/79

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

PRICE CHANGE DURING CRISES

GROSS LOSS OF SUPPLY

PRODUCTION INCREASES DURING CRISES

NET SUPPLY CHANGE

MARKET STRUCTURE FLEXIBILITY CONTRACTS PIPELINES SPOT MARKET OIL PRICE INDEXING INTEGRATION

WHY NO CRISIS IN 1990? UNCERTAINTY LOW MILITARY THREAT MINIMAL OPEC RESPONDED QUICKLY PRIVATE STOCKS HIGH SPOT MARKET LARGE SPRS AVAILABLE? FUTURES MARKET?

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 KINDLEBERGER’S LESSON

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)

REGULATION’S VALUE INSURANCE/PUBLIC GOOD SURGE CAPACITY COST/BENEFIT TEST FIGHT HOARDING BUT GOVERNMENTS HOARD TOO NOT ALLOCATION NOT PRICE SETTING

THE ROLE OF LNG CHEAP SUBSTITUTE BUT ONLY IF PRICED THAT WAY! CIF CRUDE EQUIVALENCE DOESN’T IMPROVE MATTERS IMPROVES COMPETITION UNLESS ITS ALL ALGERIAN

CONCLUSION SUPPLY DISRUPTIONS WILL OCCUR VULNERABILITY CAN’T BE ENDED NATIONAL MAYBE, GLOBAL NO BAD POLICY CAN CREATE LOSSES HOARDING FOCUS ON VOLUMES INSTEAD OF PRICE SURGE CAPACITY IS BEST INSURANCE