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ENERGY SECURITY:LIBERALIZATION, ENVIRONMENTAL POLICY AND FOREIGN POLICY
ISTITUTO BRUNO LEONIMICHAEL C. LYNCH
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TRADITIONAL VIEW
PETROLEUM IS A SCARCE RESOURCEPOSSESSION OF OIL = POLITICAL AND ECONOMIC POWERRELIANCE ON IMPORTED OIL = VULNERABILITYTHE WORLD IS VULNERABLE TO MIDDLE EASTERN POSSESSION OF OIL
WHICH WILL INCREASE SHORTLY (SEE ABOVE)
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THEREFORE:
REDUCE MIDDLE EASTERN OIL USECOAL, LNG, NUCLEAR, RUSSIAN GAS
AGGRESSIVE FOREIGN POLICYMAINTAIN GOOD RELATIONS WITH PRODUCERSCOOPERATION WITH CONSUMERS?
GOVERNMENT REGULATIONSURGE CAPACITYVOLUNTARY CONSERVATIONNATIONAL/DOMESTIC OIL COMPANIES
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BUT RESOURCE SCARCITY NOT A REAL ISSUE
FEARS BEGAN 2500 YEARS AGOSTILL WAITING
PEAK OIL IS BAD SCIENCEWARNINGS HAVE BEEN REPEATEDLY EXAGGERATED
MALTHUSIAN BIAS
PRODUCERS VULNERABLE TOODEMAND SECURITY
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OPEC MARKET SHARE FORECASTS (1996)
30%
35%
40%
45%
50%
55%
60%
1970 1980 1990 2000 2010
ACTUAL DOE IEA/CC IEA/ES WORLD BANK (1995) OPEC LYNCH/GRI
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THE “OPTIMISTIC” IEA’S FORECASTS FOR OECD OIL PRODUCTION
10
11
12
13
14
15
16
17
18
19
1967 1972 1977 1982 1987 1992 1997 2002 2007 2012 2017
MB
/D
ACTUAL 1978 1982 LOW 1982 HIGH 1994 1998 2000
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PEAK OIL/SCARCE RESOURCESPEAK OIL IS IMMINENT
(OR ALREADY PAST)
DUE TO GEOLOGICAL SCARCITYCAN’T BE ALTERED BY TECHNOLOGY OR INVESTMENTPRICES/RECESSION MUST CUT DEMAND IN RESPONSE
IMPACT IS SEVEREGLOBAL RECESSIONENERGY PRODUCERS’ POWER GROWS
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LAHERRERE FORECAST FOR UK
Curve seems to fit perfectly, but estimate of currentproduction is about 60% too low.
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CAMPBELL DISCOVERED (2005) VS URR (1997)
0.0%
50.0%
100.0%
150.0%
200.0%
250.0%
300.0%
350.0%
-50.0 -40.0 -30.0 -20.0 -10.0 0.0 10.0 20.0
BLN BBLSCampbell has found that more than half of all countries studiedhave, by 2005, found more oil than he thought they ever wouldin his 1997 analysis.
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CAN GOVERNMENTS HELP?
FIGHTING THE LAST WARPOOR ANALYSISSPECIAL INTERESTS
COAL, ETHANOL, ETC.
PERCEPTIONS SET POLICY, NOT REALITY
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YOU’RE IN GOOD HANDS…
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…OUR HERO!
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FIGHTING THE LAST WAR
1951: BUILD REFINERIES1956: BUILD SUPER TANKERS1967: EMBARGO WON’T WORK1973: FIGHT EMBARGO WITH SHARING1979: BUILD SPR1990: DON’T USE SPR2003/2007: 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 DEALSSOLVE ARAB-ISRAELI CONFLICTPREVENT GLOBAL WARMINGPROTECT ITALIAN CHEESES
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US IMPORTS OF SAUDI OIL
0
500
1000
1500
2000
2500
Jan-73 Jan-75 Jan-77 Jan-79 Jan-81 Jan-83 Jan-85 Jan-87 Jan-89 Jan-91 Jan-93 Jan-95
TB
/D
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MARKET SHARE BY COMPANY
0%
10%
20%
30%
40%
50%
60%
70%
80%
90%
100%
1 6 11 16 21 26 31 36 41 46
NUMBER OF COMPANIES
GL
OB
AL
CR
UD
E M
AR
KE
T
1953 1972 1990 1998 2001
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ENERGY SECURITY DEBATE:POLI SCI VS ECONOMICS
GEOPOLITICAL VIEWVOLUME=VULNERABILITYDANGER IS PHYSICAL SHORTAGE
ECONOMISTS’ VIEWMARKETS RESOLVE DISRUPTIONS• FUNGIBILITY
BOTH PARTLY RIGHTBUT BOTH SEE NO CRISIS IN 1973/79
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REAL PROBLEMSDISRUPTION PRICE ASSUMED LONG-TERM EQUILIBRIUM
OPEC LISTENS TO THE ECONOMISTS
MARKET NOT COMPLETELY FUNGIBLEMARKET CLEARS THROUGH PRICE MECHANISM
HOARDING CAN WORSEN PROBLEM
CATASTROPHIC FAILUREHIGHER PRICES YIELD ECONOMIC DAMAGE
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PRICE CHANGE DURING CRISES
0
2
4
6
8
10
12
14
0 12 24 36 48 60 72 84
MONTH OF/AFTER CRISIS
PR
E-C
RIS
IS P
RIC
E=
1
PRE-CRISIS PRICE 1956 1973 1978 1980 1990
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GROSS LOSS OF SUPPLY
-6000
-5000
-4000
-3000
-2000
-1000
0
1000
2000
0 1 2 3 4 5 6 7 8 9 10
MONTH OF CRISIS
TB
/D
1956 1967 1973 1978 1980 1990
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PRODUCTION INCREASES DURING CRISES
-1000
0
1000
2000
3000
4000
5000
6000
0 1 2 3 4 5 6 7 8
MONTH OF CRISIS
TB
/D
1956 1967 1973 1978 1980 1990
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NET SUPPLY CHANGE
-15.0%
-10.0%
-5.0%
0.0%
5.0%
10.0%
0 1 2 3 4 5 6 7 8
MONTHS FROM BEGINNING OF CRISIS
SH
AR
E O
F N
ON
-FS
U O
IL
1956 1967 1973 1978 1980 1990
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MARKET STRUCTURE
FLEXIBILITYCONTRACTSPIPELINESSPOT MARKET
OIL PRICE INDEXINGINTEGRATION
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WHY NO CRISIS IN 1990?
UNCERTAINTY LOWMILITARY THREAT MINIMAL
OPEC RESPONDED QUICKLYPRIVATE STOCKS HIGHSPOT MARKET LARGESPRS AVAILABLE?FUTURES MARKET?
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WHY THE CURRENT CRISIS?
2.5 MB/D OF LOST SUPPLY IN A TIGHT MARKETPOTENTIAL THREAT UNUSUALLY LARGE
RUSSIA, NIGERIA, VENEZUELA NEVER A CONCERN BEFORE
LOTS OF SPECULATIONKINDLEBERGER’S LESSON
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REGULATION AND ENERGY SECURITY
COINCIDENCE OF PRESSURE FOR LIBERALIZATION AND ENERGY SECURITY AT SAME TIMEENERGY SECURITY IS A PUBLIC GOOD
INTANGIBLE
GOVERNMENTS PROVIDE PUBLIC GOODSTHEREFORE, REGULATION IS GOOD!
(BUT SEE RUSSIAN ENVIRONMENT)
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REGULATION’S VALUE
INSURANCE/PUBLIC GOODSURGE CAPACITYCOST/BENEFIT TEST
FIGHT HOARDINGBUT GOVERNMENTS HOARD TOO
NOT ALLOCATIONNOT PRICE SETTING
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THE ROLE OF LNG
CHEAP SUBSTITUTEBUT ONLY IF PRICED THAT WAY!CIF CRUDE EQUIVALENCE DOESN’T IMPROVE MATTERS
IMPROVES COMPETITIONUNLESS ITS ALL ALGERIAN
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CONCLUSION
SUPPLY DISRUPTIONS WILL OCCURVULNERABILITY CAN’T BE ENDED• NATIONAL MAYBE, GLOBAL NO
BAD POLICY CAN CREATE LOSSESHOARDINGFOCUS ON VOLUMES INSTEAD OF PRICE
SURGE CAPACITY IS BEST INSURANCE