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EMF OP 62: The Oil Security Problem

This paper brings together several important recent strands in the energy security literatureand evaluates their contributions. It does not survey the literature, because others havealready provided excellent reviews and raised important reservations about howgovernments implement the security principle. Improving oil security in this paper refersto reducing an oil-importing country’s reliance on insecure sources of foreign oil. Thepaper begins by discussing when private markets may fail to provide appropriate signalsfor economic efficiency and public policy might be considered. Next, it reviews a recenteffort to estimate the benefits of limiting U.S. oil imports, based upon the externalitiesdiscussed in the previous section. The following section presents the key results from aneffort to estimate the risks of another oil disruption over the next ten years. This studyuses risk analysis techniques to elicit probabilities from leading geopolitical and oilsecurity experts. Finally, the paper discusses why recent oil price trends are unlikely tocreate the same economic dislocations experienced by Western economies in the past.Oil price disruptions, however, are likely to produce price shocks that could be much moredamaging, depending upon the underlying inflationary expectations at the time of adisruption.


 

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