EMF Publications

EMF SR 8 An Assessment of Oil Market Disruption Risks

Special Report

Hillard G. Huntington - Stanford University
Phil Beccue

Published by
Stanford University, 2005

The probability of the size and duration of another oil disruption is critical to the estimated value of the strategic petroleum reserve (SPR) and its desired size. Recent changes in world events (war in Iraq and Afghanistan), tensions in other parts of the world and energy markets (oil price increases), along with President Bush’s 2001 directive to the Department of Energy (DOE) to fill the SPR to its capacity of 700 million barrels to “maximize long-term protection against oil supply disruptions” have renewed interest by the DOE and other parties in understanding the risk of major oil disruptions.

The Energy Modeling Forum at Stanford University developed a risk assessment framework and evaluated the likelihood of at least one foreign oil disruption over the next ten years. Although it was recognized that domestic and weather-related oil disruptions could also be very damaging, we were asked to focus the effort specifically upon geopolitical, military, and terrorist causes for disruptions overseas. A broader study of all sources for future disruptions would have required an assessment of more experts, which would not have been possible given the resources available for the project.

The risk assessment was conducted through a series of workshops attended by leading geopolitical, military, and oil-market experts who provided their expertise on the probability of different events occurring, and their corresponding link to major disruptions in key oil market regions. Special attention was made to differentiate disruptions by their magnitude, by their likelihood of occurrence, and by whether they are short-, long-, or very long-term in duration.

The final results of the risk assessment convey a range of insights across the three dimensions of magnitude, likelihood, and length of a disruption. These conclusions are net of offsets, with the notable exception that the SPR is not included as a source of offsets. At least once during the 10-year timeframe 2005-2014:

  • The probability of a net (of offsets) disruption of 2 MMBD (million barrels per day) or more lasting at least 1 month is approximately 80%.
  • The probability of a net (of offsets) disruption of 2 MMBD or more lasting at least 6 monthsis approximately 70%.
  • The probability of a net (of offsets) disruption of 2 MMBD or more lasting at least 18 months is approximately 35%.
  • The chance of a 3 MMBD net disruption or more lasting at least 1 month is 65%; the chance of 5 MMBD ore more is about 50%.
  • There is a greater probability for any disruption lasting >1 month in the Other Persian Gulf Region (83%) comprised of Iran, Iraq, Kuwait, Qatar, UAE, and Oman, or the West of Suez region (72%) comprised of Algeria, Angola, Libya, Mexico, Nigeria, and Venezuela, than in Saudi Arabia (49%).
  • There is a lesser probability for any disruption lasting >1 month in Russia and the Caspian State (17%) than in Saudi Arabia (49%).
  • The chance of a 5 MMBD disruption size (or greater) is 60% for active war in the Middle East, 34% for no conflict in the Middle East, and 47% assuming base case assumptions.

Offsets from the use of excessive capacity outside the disrupted region reduce the size of the disruption. We conclude that offsets reduce the probability that the net distribution reaches any given size by approximately 5%-15%. Finally bigger disruptions (as measured in MMBD) last longer (number of months) than smaller disruptions.

A similar risk assessment was conducted by EMF in 1996. The current assessment covers four regions of the world instead of two regions, has updated probabilities to reflect current world conditions, and has modified excess capacity and oil supply forecasts. The net effect of these changes show san increased likelihood of disruptions for all sizes up to 10 MMBD, but the same estimate as 1996 for disruption sizes of greater than 10 MMBD (7-8% or lower).

The structured framework based on decision and risk analysis techniques provided an efficient method to quantify the complexity surrounding oil disruption scenarios in a transparent and traceable logic. The risk assessment also provided a systematic framework for supporting these estimates, and has demonstrated an approach that can be updated as future world events change.