oil security & the misperceptions of petro-nationalism james m. griffin george bush school of...
TRANSCRIPT
Oil Security & The Misperceptions of Petro-nationalism
James M. GriffinGeorge Bush School of Government, Texas A & M
Presentation forShanghai University of Finance & Economics
June 18, 2014
Petro-Nationalists’ View of Oil Security
Two Key Premises: World will soon run out of oil and there’s no
economically reasonable substitute During Disruptions oil markets are/will be
geographically fragmented so that the effects of disruptions will be localizedWinners will be those that get oil!
The Petronationalist’s Policy Prescriptions
If possible, be oil independent If can’t be independent, buy oil from
secure countries Make long term bilateral deals with
various oil producing countries guaranteeing oil supplies
During disruptions, price controls are good--they can immunize the economy
Alternative View of Oil Security
World Market is one big bath tub Oil Security is a World-wide Problem
Most likely types of disruptions1) Natural disasters
2) Internal instability within oil producing country
3) Wars between adjoining oil producers
Bath Tub Analogy
12 3 4 5
6
AB
C D EF
Why is World Oil Market One Big Bath Tub?
Oil tankers offer low cost worldwide transportation
No one producing or consuming country can control market
Price of Crude Oil by Type: 1997-2007
Figure 3.3: Price of Crude Oil by Type, 1997-2007
0
10
20
30
40
50
60
70
80
90
Jan
-97
Jul-
97
Jan
-98
Jul-
98
Jan
-99
Jul-
99
Jan
-00
Jul-
00
Jan
-01
Jul-
01
Jan
-02
Jul-
02
Jan
-03
Jul-
03
Jan
-04
Jul-
04
Jan
-05
Jul-
05
Jan
-06
Jul-
06
Jan
-07
Date
Pri
ce (
$)
pe
r B
arr
el
West Texas Intermediate Alaska North Slope Saudi Light Malaysia Tapis Blend
Implications of Petronationalists’ Strategy in a Stylized World A 1: Two exporting countries, 1 and 2, each
producing 50 barrels per day A 2: Two oil consuming countries, A and B,
each consuming 50 barrels per day A 3: Two oil producing countries: Country 1 is
secure and country 2 is insecure A 4: Oil tankers can easily move crude between
countries at very low cost A 5: Multiple Oil traders who arbritrage the
market
Stylized World
A 6: Country 1 is located near country A and country 2 is located near country B—so 1’s oil goes to A and 2’s oil goes to B
A 6: Short run price elasticity of demand is -.1 and long run elasticity is -1.0
A 7: Both producing countries have a maximum capacity just equal to market demand
Free Market: Oil Flows to Nearest Buyer-Normal Period
Normal
Period Country A Country B
Country 1 (secure) 50 0
Country 2 (insecure) 0 50
World Price = $100
Free Market: Disruption in Producing Country 2
Disruption Period Country A Country B
Country 1 (secure) 25 25
Country 2 (insecure) 0 0
Price Spike: 500%
New World Price = $600
Country B Adopts Bilateral Deal with 1--- Normal Period
Normal
Period Country A Country B
Country 1 (secure) 0 50
Country 2 (insecure) 50 0
World Price = $100
Country B Adopts Bilateral Deal with 1--- at fixed price, no trade with A
Disruption Period Country A Country B
Country 1 (secure) 0 50
Country 2 (insecure) 0 0
A’s Price Spike: +1000%
B’s Price fixed at $100
But is this realistic?
Wouldn’t country 1 renege on its guarantee price of $100 to B?
Even if not, oil traders would have huge incentives to divert oil to Country A
Would it be in B’s best interests to have such a huge price shock in A given that they are trading partners?
Country B Unilaterally Cuts Consumption by 50% via a 100% tariff--Normal Period
Normal
Period Country A Country B
Country 1 (secure) 37.5 0
Country 2 (insecure) 12.5 25
World Price = $100
B’s Domestic Price = $200
Country B Unilaterally Cuts Consumption by 50%--Disruption Period
Disruption Period Country A Country B
Country 1 (secure) 33.3 16.7
Country 2 (insecure) 0 0
Price Spike: 330%
New World Price = $430
Country B becomes oil independent @ $200 and Country 1 can only produce 25
Disruption Period Country A Country B
Country 1 (secure) 25 0
Country 2 (insecure) 25 0
Country B 0 25
Assume Disruption and B refuses to export oil to A
Disruption Period Country A Country B
Country 1 (secure) 25 0
Country 2 (insecure) 0 0
Country B 0 25
World Price + 500%
B’s price unchanged
Assume Disruption and B exports to A
Disruption Period Country A Country B
Country 1 (secure) 25 0
Country 2 (insecure) 0 0
Country B 4 21
World Price + 420%
B’s price + 160%
Was Oil Independence & Withdrawal from World Market Rational? Cons:
During Normal Period: Country B incurs high cost to be oil independent hurting its exports
During Disruption Period: Country B missed profits of selling oil to A
World trade consequences would be severe
Pros: Only makes sense if A is an enemy
Keys to Oil Security Think a World Problem not a China or U.S.
Problem Think Bath Tub Want more faucets into Bath Tub Reduced world dependency on insecure oil
Keys to Oil Security Think of it as a World Problem not a China or
U.S. Problem Think Bath Tub
Implications of Bath Tub More faucets into bath tub the better Want a more secure mix of oil in bath
tub
Market Forces are Best Hope for Oil Security
Natural incentive to develop secure supplies
Natural incentive to hold emergency supplies
Avoid Price Controls –U.S. experience in the 1970’s was a serious mistake
Firms and consumers have remarkable ability to adapt in emergencies