The Oil Security Problem

This paper brings together several important recent strands in the energy security literature and evaluates their contributions. It does not survey the literature, because others have already provided excellent reviews and raised important reservations about how governments implement the security principle. Improving oil security in this paper refers to reducing an oil-importing country’s reliance on insecure sources of foreign oil. The paper begins by discussing when private markets may fail to provide appropriate signals for economic efficiency and public policy might be considered. Next, it reviews a recent effort to estimate the benefits of limiting U.S. oil imports, based upon the externalities discussed in the previous section. The following section presents the key results from an effort to estimate the risks of another oil disruption over the next ten years. This study uses risk analysis techniques to elicit probabilities from leading geopolitical and oil security experts. Finally, the paper discusses why recent oil price trends are unlikely to create 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 more damaging, depending upon the underlying inflationary expectations at the time of a disruption.