The Analysis of Oil Supply SeThe Analysis of Oil Supply Security and Diversification Policurity and Diversification Poli

cy in Taiwancy in Taiwan--A Shannon-Weinen Index Ap--A Shannon-Weinen Index Ap

proachproach

Ssu-li ChangSsu-li Chang, Yen-yin Chen , Yen-yin Chen

Professor, Institute of Natural Resource ManagemeProfessor, Institute of Natural Resource Management, National Taipei University nt, National Taipei University

Master, Institute of Natural Resource ManagemenMaster, Institute of Natural Resource Management, National Taipei Universityt, National Taipei University

ContentContent

IntroductionIntroduction Energy Security and Measures of Oil Supply SEnergy Security and Measures of Oil Supply S

ecurity ecurity Energy Security: A Changing ConceptEnergy Security: A Changing Concept Measures of Supply SecurityMeasures of Supply Security

Dependence indexDependence index Vulnerability Index Vulnerability Index

Shannon-Weiner Index for Six Asian CountrieShannon-Weiner Index for Six Asian Countries of APEC Memberss of APEC Members

Conclusion Conclusion

WTIWTI Price and Average Energy Import Pri Price and Average Energy Import Price in Taiwan, 2003.7-2004.8ce in Taiwan, 2003.7-2004.8

Time period

WTI Price(US $ /barrel)

Crude oil import

price(US$/barrel in

CIF)

LNG import price(US$ /ton)

Coking Coal

import price

(US$/ton)

Steam Coal

import price

(US$/ton)

2003.7. 30.75 26.31 256.53 30.78 48.37

8. 31.57 27.40 260.43 31.11 52.48

9. 28.31 27.60 268.29 31.34 47.62

10 30.34 26.55 264.93 31.71 50.00

11 31.11 27.72 281.87 30.89 54.17

12 32.13 28.18 284.93 33.92 53.49

2004.1 34.31 28.75 288.23 35.45 51.88

2 34.74 29.26 290.73 43.78 63.09

3 36.71 28.76 284.61 45.21 60.05

4 36.69 30.91 305.42 48.27 72.71

5 40.24 32.33 304.15 46.94 76.66

6 38.00 34.62 324.03 49.94 63.52

7 40.79 34.05 323.96 50.65 69.09

8 45.00 37.38 n.a. n.a. n.a.

The monthly average spot market price of WTI increases more than 40 percent since July 2003 and reaches its record high in history as over 50 dollars per barrel on October 1The percentage increase for the imported crude oil price is about 29.42 percent in Taiwan.The reason for the relative lower import price of oil in Taiwan is that Taiwan imports most of its crude oil from Middle East area where the quality of crudes is generally lower and hence the price.

World Oil Supply DisruptionsWorld Oil Supply Disruptions

The current upheaval situation in ME area lends urgency to Taiwan regarding the issue of the alleviation of the import dependency of Middle East oil. Over the past half century, there have been at least 14 significant disruptions involving a loss of 0.5 mb/d or more of crude oil, in which ME accounted for 11 of them.

Most of the disruptions had negative effect on oil price and/or physical quantity.

Oil consuming countries were stricken by high inflation, trade and payments imbalances, high unemployment and weak business and consumer confidence.

Oil proved reserves, share 1980-Oil proved reserves, share 1980-20022002

However, it is foreseeable that the concentration of the global oil supplies in the Middle East and the declination of supplies from outside the regions will undoubtedly cause growing dependence on Middle East oil.

Oil Production Projections by ReOil Production Projections by Region (1965-2030)gion (1965-2030)

Market manipulation power is expected to increase for OPEC, and hence exert an upward pressure on the price of oil. Taking into account of the highly unstable situation in this area, the growing dependence on Middle East oil will pose threat to energy security for all the oil importing countries.

1990 1991 1992 1993 1994 1995 1996 1997 1998 1999 2000 2001Asia Pacific 16% 15% 14% 17% 18% 16% 12% 13% 11% 10% 11% 9%Other Africa 0% 0% 0% 4% 6% 3% 12% 13% 15% 12% 14% 13%Congo 0% 0% 0% 0% 0% 9% 9% 8% 8% 13% 14% 11%Other Middle East 16% 15% 16% 15% 14% 11% 6% 4% 7% 16% 9% 6%UAE 9% 10% 8% 7% 6% 8% 7% 7% 9% 6% 5% 5%Saudi Arabia 38% 45% 41% 39% 35% 32% 29% 32% 29% 23% 25% 30%Juwait 14% 1% 8% 10% 10% 12% 12% 11% 10% 8% 11% 15%Iran 4% 9% 10% 7% 10% 8% 11% 9% 10% 11% 11% 12%Western Hemisphere 2% 4% 3% 1% 1% 2% 3% 3% 1% 1% 0% 0%

0%10%20%30%40%50%60%70%80%90%

100%

Crude Import Shares of Taiwan (%)

Currently, about 80 percent of the crude oil is imported from ME for Taiwan.

At the same time, Taiwan also has the highest proportion of imports from Africa amongst Asian APEC importers, which was 23.6 percent in 2001

In SummaryIn Summary

Given the upheaval situation in Middle East, thGiven the upheaval situation in Middle East, the energy security and oil supply diversification e energy security and oil supply diversification policies have been given high priorities for the policies have been given high priorities for the Energy Bureau of Taiwan. Energy Bureau of Taiwan.

West Africa has emerged as a major diversificaWest Africa has emerged as a major diversification source for Taiwan in searching for alternation source for Taiwan in searching for alternative oil import region. tive oil import region.

It is thus the purpose of this paper to examine It is thus the purpose of this paper to examine the effect of this diversification direction to ththe effect of this diversification direction to the oil supply security as well as energy security ie oil supply security as well as energy security in Taiwan. n Taiwan.

II. Energy Security and Measures oII. Energy Security and Measures of Oil Supply Securityf Oil Supply Security

Energy Security: A Changing Concept Energy Security: A Changing Concept Due to the constant evolution of the energy Due to the constant evolution of the energy

market and technologies, security of supply market and technologies, security of supply is a changing concept and therefore requireis a changing concept and therefore requires new policies to deal with the issue. s new policies to deal with the issue.

A number of different approaches and definiA number of different approaches and definitions of security of supply have been put fortions of security of supply have been put forward to accommodate the new economic award to accommodate the new economic and commercial environment. nd commercial environment.

Different definitions, common features:Different definitions, common features: all the definitions avoid the term ‘policy’, all the definitions avoid the term ‘policy’,

which reflects the growing conviction that which reflects the growing conviction that security of supply is a shared responsibility security of supply is a shared responsibility among governments, firms and customers .among governments, firms and customers .

by defining security of supply in terms of a by defining security of supply in terms of a risk-management strategy, the concept has risk-management strategy, the concept has been perceived as some sort of cost/risk been perceived as some sort of cost/risk judgments. judgments.

both physical availability and price volatility both physical availability and price volatility are two equally important constituent parts are two equally important constituent parts and its effect are inextricably linked in the and its effect are inextricably linked in the concept of supply security. concept of supply security.

Measures of Supply SecurityMeasures of Supply Security Measure Physical Dimension Economic Dimension

Dependence Fuel Import Share of Product Supplied Gross Net

Value of Imports Fuel Import Value as

Percent of Total Merchandise Value

Vulnerability GENERAL Percent of World Imports Days Supply of Stocks SUPPLY-SIDE MEASURE Diversity index and concentration of

supply DEMAND-SIDE MEASURE Fuel Used in Transportation Fuel Used per Capita

Fuel Consumption per Dollar of GDP

Fuel Expenditures per Dollar of GDP

Reliability Percentage of time that electricity is available for use

Excess of generation capacity on effective consumption

Electrification rate (number of people with access to electricity)

Value of investments

Source: Kendall, 1998; IEA, 2001 ;INDES, 2004

Dependence IndexDependence Index

Gross oil imports

dependence

Net oil imports dependence

OPEC oil imports

dependence

Arab OPEC oil imports

dependence

Persian Gulf oil imports

dependence

1979~1981X X

1982~1994X

X X

1995~2000X X

X

2001~X X X

X

*Gross oil imports dependence＝ Gross oil imports / Product supplied* Net oil imports dependence＝（ Net oil imports dependence） / Product supplied* OPEC oil imports dependence ＝ OPEC oil imports / Product supplied*Arab-OPEC oil imports dependence＝ Arab-OPEC oil imports / Product supplied* Persian Gulf oil imports dependence＝ Persian Gulf oil imports / Product supplied*Countries of Persian Gulf include Bahrain, Iran, Iraq, Kuwait, Qatar, Saudi Arabia, UAE..*Members of OPEC in 2004 include Algeria, Indonisia, Iran, Iraq, Kuwait, Nigeria, Qatar, Saudi Arabia, UAE, Venezuela.*Countries of Arab-OPEC include Algeria, Iraq., Kuwait, Libya, Qatar, Saudi Arabia, UAE.

Vulnerability IndexVulnerability Index

general measures (percentage of worlgeneral measures (percentage of world imports);d imports);

supply-side indices (diversity and concsupply-side indices (diversity and concentration index); entration index);

demand-side measures demand-side measures

Diversity Index Diversity Index

Shannon-Weiner Index (Shannon-Weiner Index (SWSW) )

XiXi ：： the market share of supply country the market share of supply country ii The index increases as the number of difThe index increases as the number of dif

ferent supply countries increases. ferent supply countries increases. it assumes value in a range 0 ≤ SW ≥ 2, it assumes value in a range 0 ≤ SW ≥ 2,

of which 0 and 2 each denotes the lower of which 0 and 2 each denotes the lower and upper bound of the diversity. and upper bound of the diversity.

i

ii XXSW ln

Adjusted Shannon Weiner-Neumann InAdjusted Shannon Weiner-Neumann Index dex (SW1 (SW1 andand SW2 SW2))

i

iii bXXSW ln1

where bi represents an index of political stability of exporting country, 0-100%

gbXXSWi

iii

1ln2

where g represents the share of indigenous production.

III. Shannon-Weiner Index for Six Asian III. Shannon-Weiner Index for Six Asian Countries of APEC MembersCountries of APEC Members

Shannon-Weiner Index was estimated for six Asian Shannon-Weiner Index was estimated for six Asian countries of APEC members, namely, Taiwan, Soutcountries of APEC members, namely, Taiwan, South Korea, Japan, China, Thailand and Philippines. h Korea, Japan, China, Thailand and Philippines.

The diversity of these countries in their energy supThe diversity of these countries in their energy supply and demand structures provokes wide-ranging ply and demand structures provokes wide-ranging discussions and perceptions about energy security. discussions and perceptions about energy security.

The comparative results of oil supply diversificatioThe comparative results of oil supply diversification on reveals relative instead of absolute implication on reveals relative instead of absolute implications on security issues and we suggest that the result ns on security issues and we suggest that the result of this study should be perceived in this way. of this study should be perceived in this way.

Indicators of Crude Import Diversity for Six AsiIndicators of Crude Import Diversity for Six Asian Countries of APEC members (by Import Coan Countries of APEC members (by Import Co

untries)untries)

0

0.5

1

1.5

2

2.5

1990 1991 1992 1993 1994 1995 1996 1997 1998 1999 2000 2001

SouthKoreaTaiwan

Japan

China

Thailand

Philippines

the degree of oil import diversification achieved by Taiwan are rather impressive, especially in the period of 1995 to 2001. the SW for Taiwan, Japan and South Korea are relatively stable over the years. the import shares of China shows substantial changes

Indicators of Crude Import Diversity for Indicators of Crude Import Diversity for Six Asian Countries of APEC members Six Asian Countries of APEC members (by Import Region)(by Import Region)

0.00

0.20

0.40

0.60

0.80

1.00

1.20

1.40

1990 1991 1992 1993 1994 1995 1996 1997 1998 1999 2000 2001

China

Taiwan

South Korea

Thailand

Japan

Philippines

The SW index change when the sources of oil import are grouped by region.Taiwan, second to China, shows relative balance on oil import areas among six countries. The import areas for the rest of the countries are mostly concentrated in Middle East so that the index deteriorates to certain degree in this way of estimation

Political Stability Indicators (SelectePolitical Stability Indicators (Selected Countries), 2002d Countries), 2002

Country Esti. S.E. Prob. Country Esti. S.E. Prob.

OPEC and Middle East Equatorial Guinea -1.18 0.51 0.01

Indonesia -1.85 0.23 0.00 Nigeria -1.53 0.26 0.00

Iraq -1.90 0.27 0.00 Other crude Exporters

Algeria -1.70 0.27 0.00 Australia 1.32 0.23 1.00

Congo -1.84 0.44 0.00 Norway 1.42 0.23 1.00

Yemen -1.19 0.32 0.00 Russia -0.53 0.23 0.01

Venezuela -0.48 0.23 0.02 Ukraine -0.51 0.25 0.02

Irab -0.17 0.25 0.25 Kazak 0.32 0.25 0.90

Kuwait 0.73 0.29 0.99 Some of Importers

Omen 1.01 0.27 1.00 Philippines -0.32 0.23 0.08

UAE 1.20 0.29 1.00 China 0.27 0.23 0.88

Libya -0.49 0.29 0.05 Taiwan 0.71 0.23 1.00

Qatar 1.46 0.29 1.00 Thailand 0.28 0.23 0.89

Africa British 1.17 0.23 1.00

Angola -2.33 0.27 0.00 Japan 1.22 0.23 1.00

Rep. of Congo -2.83 0.34 0.00 Germany 1.27 0.23 1.00

Cameroon -0.48 0.28 0.04 U.S. 1.26 0.23 1.00

The political stability indicators are obtained from the World Bank Report on Governance Matters III: Governance Indicators for 1996-2002 in which the information are drawn from 25 separate data sources constructed by 18 different organizations The oil producing countries in Africa generally have poor performance in political stability.

Comparison of SW, SW1 and SW2 for Comparison of SW, SW1 and SW2 for six Asian Countries of APEC members six Asian Countries of APEC members

0

0.5

1

1.5

2

2.5

Japan South Korea China Taiwan Philippines Thailand

SW SW1 SW2

The value of SW1 and SW2 decrease considerably after the political stability factor been added for all the six countries. The largest decrease of the value of SW1 and SW2 can be found in the case of Taiwan, which also has the highest proportion of imports from Africa.

IV. ConclusionIV. Conclusion

According to the calculation results, the sole considerAccording to the calculation results, the sole consideration of import sources diversification while leave out ation of import sources diversification while leave out the internal political situation of the import country athe internal political situation of the import country and/or region, may be insufficient to reveal vulnerabilitnd/or region, may be insufficient to reveal vulnerability of supply disruption that specific country may be coy of supply disruption that specific country may be confronted, as shown in Taiwan’s case. nfronted, as shown in Taiwan’s case.

From this viewpoint, the policy direction regarding thFrom this viewpoint, the policy direction regarding the contribution of diversify import sources to West Africe contribution of diversify import sources to West Africa to release oil disruption risk and hence strengthen ta to release oil disruption risk and hence strengthen the energy security of Taiwan are not conclusive and nhe energy security of Taiwan are not conclusive and need further investigation. eed further investigation.

IV. Conclusion (continued)IV. Conclusion (continued)

In fact, the reasons for the West Africa being eIn fact, the reasons for the West Africa being emerged as a major diversification source for Asmerged as a major diversification source for Asian-Pacific countries are not merely energy secian-Pacific countries are not merely energy security consideration. urity consideration.

Most of West African crudes are low-sulphur coMost of West African crudes are low-sulphur content, as the demand of low-sulphur products ntent, as the demand of low-sulphur products increase due to the stringent environmental reincrease due to the stringent environmental regulation of consuming countries, demand of Wgulation of consuming countries, demand of West African crudes expected to grow in the comest African crudes expected to grow in the coming years. ing years.

the effect as well as the contribution of tthe effect as well as the contribution of the diversification should be evaluated nhe diversification should be evaluated not only on the ground of energy security, ot only on the ground of energy security, but also taking into account of the prodbut also taking into account of the production and export capacities of alternatiuction and export capacities of alternative supply sources; crude oil quality; tranve supply sources; crude oil quality; transport distance and freight costs and the sport distance and freight costs and the refining capacity make-up of the country.refining capacity make-up of the country.

IV. Conclusion (continued)IV. Conclusion (continued)

Finally, this paper argue that in the long run measures of Finally, this paper argue that in the long run measures of vulnerability are likely to be more useful to policymakers than vulnerability are likely to be more useful to policymakers than measures of dependence. Measures of dependence simply measures of dependence. Measures of dependence simply show the extent of the Nation’s imports.show the extent of the Nation’s imports.

In contrast, measures of vulnerability show the meaning of the In contrast, measures of vulnerability show the meaning of the imports, indicating the Nation’s vulnerability to shortages, imports, indicating the Nation’s vulnerability to shortages, disruptions, and price spikes.disruptions, and price spikes.

By studying measures of vulnerability, policymakers can By studying measures of vulnerability, policymakers can weigh their progress toward insulating the Nation from the weigh their progress toward insulating the Nation from the harmful effects of sharp changes in the world harmful effects of sharp changes in the world oil market.oil market.

IV. Conclusion (continued)IV. Conclusion (continued)

Thank you!!