An Assessment of Oil Market Disruption Risks
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 (a range of Middle Eastern conflicts), tensions in other parts of the world and vastly changing energy markets (US oil supply expansion and the oil price collapse in late 2014), along with pending important policy decisions related to the Department of Energy (DOE)’s SPR capacity have renewed interest by the DOE and other parties in understanding the risk of major oil disruptions.
The Energy Modeling Forum at Stanford University will develop a risk assessment framework and evaluate 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 will focus the effort specifically upon geopolitical, military and terrorist causes for disruptions overseas. A broader study of all sources for future disruptions would require an assessment of more experts, which will not be possible given the resources available for the project.
The risk assessment will be conducted through a series of workshops attended by leading geopolitical, military and oil-market experts who will provide their expertise on the probability of different events occurring, and their corresponding link to major disruptions in key oil market regions. Special attention will be made to differentiate disruptions by their magnitude, by their likelihood of occurrence, and by their duration. A critical step will be a precise definition of what constitutes an oil market disruption that is sufficiently large to change SPR decisions.
The final results of the risk assessment will convey a range of insights across the three dimensions of magnitude, likelihood, and length of a disruption. Offsets from the use of excess capacity outside the disrupted region reduce the size of the disruption. These conclusions are net of offsets like commercial and non-U.S. public stockpile releases. Releases by the SPR will not be evaluated by the expert panel because the study will develop information about world oil market conditions in the absence of U.S. stockpiles. This information will then be incorporated into other DOE analyses geared specifically to aid decisions about the stockpile’s size and its release.
A similar risk assessment was conducted by the EMF in 1996 and 2005. The 2005 assessment covered four regions of the world instead of two regions in the 1996 effort, updated probabilities to reflect 2005 world conditions, and modified excess capacity and oil supply forecasts.
The structured framework based on decision and risk analysis techniques provides an efficient method to quantify the complexity surrounding oil disruption scenarios in a transparent and traceable logic. The risk assessment also provides a systematic framework for supporting these estimates, and can be updated as future world events change.
The study plan calls for four different meetings.
1. Framing Discussion involving EMF staff and consultants, Department of Energy staff and Oak Ridge National Laboratory staff.
2. Assessment Workshop to Structure the Framework involving the above participants plus oil disruption experts that will be selected by SPRO and the EMF project team. (Most likely location will be Washington DC).
3. Assessment Workshop to Evaluate the Probabilities involving the above participants plus oil disruption experts participating in the first workshop. (Most likely location will be Washington DC).
4. Summary and Discussion of Results with DOE management and the above participants including experts. (Most likely location will be Washington DC).
It is anticipated that the two workshops will take place during September and October 2015. This schedule will allow the EMF team to provide DOE, SPRO and its contractors with preliminary risk assessments as inputs to other projects by the middle of November. A draft final report discussing the approach and key results will be submitted within six weeks after the final workshop.