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EMF SR 8: An Assessment of Oil Market Disruption Risks

The probability of the size andduration of another oil disruption is critical to the estimated valueof the strategic petroleum reserve (SPR) and its desired size. Recentchanges in world events (war in Iraq and Afghanistan), tensions inother 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” haverenewed interest by the DOE and other parties in understanding the riskof major oil disruptions.

The Energy Modeling Forum at Stanford University developed a riskassessment framework and evaluated the likelihood of at least oneforeign oil disruption over the next ten years. Although it wasrecognized that domestic and weather-related oil disruptions could alsobe very damaging, we were asked to focus the effort specifically upongeopolitical, military, and terrorist causes for disruptions overseas.A broader study of all sources for future disruptions would haverequired an assessment of more experts, which would not have beenpossible given the resources available for the project.

The risk assessment was conducted through a series of workshopsattended by leading geopolitical, military, and oil-market experts whoprovided their expertise on the probability of different eventsoccurring, and their corresponding link to major disruptions in key oilmarket regions. Special attention was made to differentiate disruptionsby their magnitude, by their likelihood of occurrence, and by whetherthey are short-, long-, or very long-term in duration.

The final results of the risk assessment convey a range of insightsacross the three dimensions of magnitude, likelihood, and length of adisruption. These conclusions are net of offsets, with the notableexception that the SPR is not included as a source of offsets. At leastonce 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 monthin the Other Persian Gulf Region (83%) comprised of Iran, Iraq, Kuwait,Qatar, UAE, and Oman, or the West of Suez region (72%) comprised ofAlgeria, Angola, Libya, Mexico, Nigeria, and Venezuela, than in SaudiArabia (49%).
  • There is a lesser probability for any disruption lasting >1 monthin Russia and the Caspian State (17%) than in Saudi Arabia (49%).
  • The chance of a 5 MMBD disruption size (or greater) is 60% for activewar 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 regionreduce the size of the disruption. We conclude that offsets reduce theprobability that the net distribution reaches any given size byapproximately 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 currentassessment covers four regions of the world instead of two regions, hasupdated probabilities to reflect current world conditions, and hasmodified excess capacity and oil supply forecasts. The net effect ofthese changes show san increased likelihood of disruptions for allsizes up to 10 MMBD, but the same estimate as 1996 for disruption sizesof greater than 10 MMBD (7-8% or lower).

The structured framework based on decision and risk analysis techniquesprovided an efficient method to quantify the complexity surrounding oildisruption scenarios in a transparent and traceable logic. The riskassessment also provided a systematic framework for supporting theseestimates, and has demonstrated an approach that can be updated asfuture world events change.