The New Global Oil Market: Understanding Energy Issues in the World Economy

By Siamack Shojai | Go to book overview

shocks. Under the current program structure, however, drawdowns are political decisions subject to noneconomic as well as economic considerations. For example, the negative economic effects of the oil price rise at the onset of the Gulf War could have been reduced by an earlier decision to draw down the SPR; the delay may have been the result of a political decision to build support for the war by allowing consumers to see higher petroleum prices ( Horwich 1992).

Several proposals have been made with an eye toward making the early use of the SPR more likely ( Horwich and Weimer 1984). One approach is political: create a constituency for early drawdowns by earmarking revenue from sale of oil for distribution to the states for emergency relief to localities that must legally operate under balanced budgets. Another approach is to enable private actors to initiate drawdowns through an options system. Options, conferring the right to purchase oil within some period from the SPR at some price higher than the current market price, would be continually auctioned. If the market price were to rise above the price specified in the option, then holders of options would exercise them and drawdown would commence. Creating mechanisms like these to increase the likelihood that the existing SPR will be used at the onset of disruptions may be more valuable than simply expanding its size.


CONCLUSION

The energy security problem facing the United States results from the vulnerability of the world oil market to sudden losses of oil supply from the Persian Gulf. It is clear that the United States should not respond to oil price shocks by repeating the mistaken price controls and administrative allocations that were so economically costly in the 1970s. Most debate about policies for increasing energy security has focused on oil import fees and oil stockpiles. Sufficient questions remain about the effects of oil import fees to raise serious doubts about their desirability; a much less equivocal body of analysis supports an oil stockpile at least as large as the current Strategic Petroleum Reserve.


NOTES
1.
The ratio of net petroleum imports (crude oil and petroleum products) to total petroleum products supplied (including exports) was 40.5 percent. The ratio of net petroleum imports (6.895 mbd) to the sum of net petroleum imports and domestic production (7.153 mbd crude oil and 1.696 mbd natural gas plant production) is 43.4 percent ( Energy Information Administration 1993).
2.
A surge capacity of I billion barrels/year would require that about 7 billion barrels of reserves, a substantial fraction of total U.S. proven reserves, be developed and then shut-in. If the reserves were in northern Alaska, then a second pipeline to handle the surge would have to be built.

-235-

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