Transcript Slide 1

The Value of Strategic Oil Stocks Under
Reduced U.S. Oil Imports
Paul N. Leiby*, David Bowman**,
Gbadebo Oladosu*, Rocio UriaMartinez*, Kenneth Vincent***
*Oak Ridge National Laboratory, **Econotech,
***U.S. Dept. of Energy
Presented at the meeting of the U.S. Association
for Energy Economics,
Managed by UT-Battelle
for the Department of Energy
July 29, 2013
1. Context and Objective
 Changing oil market conditions and expectations
– Increases in tight oil production in U.S.
– Decreasing consumption and imports of oil
 Interest in implications for U.S. oil security
 Strategic petroleum reserve benefits
– Response to severe global and local shocks
– Avoided GDP losses
– Reduced oil import expenditures
 Evaluate how major increases in U.S. oil production
will change benefits of oil stocks to U.S.
 Paper does not advocate any particular policy course
of action, it speaks to contemporary debates.
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Outline – rest of talk
1. Context and objective
2. Approach (method and assumptions)
3. Results
1. Comparison of world views: AEO2010 vs. 2013
2. Alternative future cases
3. Sensitivity to assumptions
4. Conclusions
1. Key insight(s)
2. Limitations, Outstanding Issues for Future Work
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2. Approach
 Simulation model to quantify benefit of
emergency stocks, with disruption
– Focus on global crude oil supply shocks
– Economic benefits are quantified in terms of
avoided GDP losses and import costs
 Compare benefits of stocks in different cases
– coordinated use of U.S./IEA emergency stocks
B E
 
T
t 0
t

~
~
GDPt (P(S wt  S stk ))  CI (P(S wt  S stk ))
T


~
~
 E  t GDPt (P(S wt ))  CI (P(S wt ))
t 0
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Benefits of Emergency Oil Stocks:
Simulation Framework
 Various reference world
oil market conditionsINPUT
compared.
Reference
Market
Conditions
Projected Spare
Capacity
Non-IEA Member
Emergency Oil
Stock
Capabilities
IEA Emergency
Oil Stock
Capabilities
 Storage sizes,
capabilities characterized
 30 year time horizon
Monte Carlo simulation,
including the possibility
of disruptions (generated
using EMF probabilities).
OUTPUT
 Economic Benefits of
storage and drawdown
estimated.
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Oil Supply
Disruption
Module
(Loss Quantities
and Durations)
Post Disruption
Supply, Demand
& Price Levels
(before
IEA
Response)
STOCKHOLDING
BENEFITS
MODEL
Post Disruption
Supply, Demand
& Price Levels
(after
IEA
Response)
Market & Economic
Response Module
(Price Elasticities of
Supply, Demand &
GDP)
Collective Benefits
-GDP Loss Avoidance
-Oil Import Savings
Model Features and Inputs
 Disruption risks (event sizes, durations, probabilities)
– Based on EMF/Huntington/Beccue 2005
 Price determination during shocks
 Market demand responses – short & long-run elasticities
– higher range -0.11 to -0.25 annual elas., depending on disruption
– lower range -0.05 to -0.19 (Dargay & Gately 2010)
 GDP responses to prices
– Estimated range, based on prior studies and review of recent
literature (range -0.0316 to -0.0086, Mean -0.024, for U.S.)
 Other Data Sources
– Global oil market projection based on EIA Annual Energy
Outlook (AEO)

base, undisrupted prices, supplies, demand, capacities, imports
– Stock levels: IEA
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Market Factors that Influence Stock
Benefits under Increasing U.S. Oil
production in the United States
 Domestic production levels
 Consumption levels
 => Import levels
 Reference prices
 World oil supply at risk
 Spare production capacity (global)
 GDP growth rates
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U.S. Liquid Fuels Net Imports
U.S. Liquid Fuels Net Imports
25
AEO 2010 Base Case
AEO 2013 Base Case
AEO 2013 High Oil Price Case
AEO 2013 Low Oil Price Case
AEO 2013 Lower Oil Resources Case
AEO 2013 Higher Oil Resources Case
Historic
MMBD
20
15
10
5
0
2000
2005
2010
2015
2020
Year
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2030
2035
2040
World Oil Prices
Average Imported Refiners Acquisition Cost (World Oil Price)
300
250
$2010/BBL
200
AEO 2010 Base Case
AEO 2013 Base Case
AEO 2013 High Oil Price Case
AEO 2013 Low Oil Price Case
AEO 2013 Lower Oil Resources Case
AEO 2013 Higher Oil Resources Case
Historic
150
100
50
0
2000
2005
2010
2015
2020
Year
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2030
2035
2040
OPEC Liquid Fuels Supply
OPEC Liquid Fuels Supply
60
55
50
MMBD
45
AEO 2010 Base Case
AEO 2013 Base Case
AEO 2013 High Oil Price Case
AEO 2013 Low Oil Price Case
AEO 2013 Lower Oil Resources Case
AEO 2013 Higher Oil Resources Case
Historic
40
35
30
25
20
2000
2005
2010
2015
2020
Year
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2035
2040
In AEO2013, new supply sources diminish
global reliance on risky supply
At Risk Supply as a Percent of World Supply
65%
60%
%
55%
AEO 2010 Base Case
50%
AEO 2013 Base Case
AEO 2013 High Oil Price Case
AEO 2013 Low Oil Price Case
45%
AEO 2013 Lower Oil Resources Case
AEO 2013 Higher Oil Resources Case
Historic
40%
2000
2005
2010
2015
2020
Year
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OPEC Spare Capacity
 Consistent with OPEC
statements and some
DOE projections:
assume target ~2.8
MMBD
8
AEO 2010 Base Case
AEO 2013 Base Case
AEO 2013 High Oil Price Case
AEO 2013 Low Oil Price Case
AEO 2013 Lower Oil Resources Case
AEO 2013 Higher Oil Resources Case
Historic
7
6
5
MMBD
 In cases where OPEC
supply declines,
assume spare
capacity expands, but
trends back to target
over 10 years.
OPEC Spare Capacity
4
3
2
1
0
2000
2005
2010
2015
2020
Year
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2030
2035
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IEA Max Drawdown Rate as a
Function of Size for Year 2013
Total IEA Remaining Reserve Size (Month Beginning, MMB)
2,496
30
1,612
754
453
244
93
13
0
Max Drawdown Rate (MMBD)
IEA Asia Pacific Industry Obligated Stocks
IEA Europe Industry Obligated Stocks
25
IEA Asia Pacific Public Stocks
IEA Europe Public Stocks
20
IEA North America Public Stocks
15
Industry Obligated
Stocks
Public
Stocks
10
5
0
1
2
3
4
5
Month
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7
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3. Results
 Results calculated and presented in terms of
benefits timepaths, NPV and average dollar
benefits per barrel per year, with confidence
intervals
 Includes a reference case as well as
sensitivity cases with different potential
levels of U.S. oil output, consumption and
imports
 Other benefits that are potentially important
but more difficult to quantify not included
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Annual U.S. Benefits of Emergency Oil
Stockpiling: Implications of Evolving
World View (AEO2010 vs AEO2013 Base)
Annual
Benefits
of IEA
Emergency
Oil Stockpiling
U.S.U.S.
Benefits
of IEA
Emergency
Oil Stockpiling
70100
90
AEO
AEO2010:
2010: Base
BaseCase
Case
80
AEO
AEO2013:
2013: Base
BaseCase
Case
Undiscounted
$/BBL,
Undiscounted
$2010,
Billions
60
50 70
40
60
50
30
40
20 30
20
10
10
0 0
2010
2010
2015
2015
2020
2020
2025
2025
2030
2030
Year
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Undiscounted time stream
2035
2035
2040
2040
2045
Annual U.S. Benefits of Emergency Oil
Stockpiling: AEO2013 Higher and Lower
U.S. Resource Cases (with Base)
Annual
Benefits
of IEA
Emergency
Oil Stockpiling
U.S. U.S.
Benefits
of IEA
Emergency
Oil Stockpiling
7090
Undiscounted
Undiscounted
$2010,
Billions
$/BBL/,
80
60
70
50
60
AEO
2013:Base
Base
Case
AEO
2013:
Case
AEO
2013:
U.S.
OilOil
Resources
Case
AEO
2013:Lower
Lower
U.S.
Resources
Case
AEO
2013:
U.S.
OilOil
Resources
Case
AEO
2013:Higher
Higher
U.S.
Resources
Case
4050
3040
30
20
20
10
10
00
2010
2010
2015
2015
2020
2020
2025
2025
2030
2030
Year
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Undiscounted time stream
2035
2035
2040
2045
U.S. Benefits of IEA Emergency Oil
Stockpiling, Higher Demand Elasticities
U.S. Benefits of IEA Emergency Oil Stockpiling
Billions $2010, 7% Discount Rate
600
Discount
Rate 7%
500
400
300
200
100
0
AEO 2010:
Base Case
AEO 2013:
Base Case
SPR Net Revenue
Avoided Net Import Costs
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Avoided GDP Losses
AEO 2013:
High Oil Price
Case
AEO 2013:
AEO 2013:
AEO 2013:
Low Oil Price Lower U.S. Oil Higher U.S. Oil
Case
Resources Case Resources Case
NPV over 2013-2043
U.S. Benefits of IEA Emergency Oil
Stockpiling, Lower Demand Elasticities
U.S. Benefits of IEA Emergency Oil Stockpiling
1,600
Billions $2010, 7% Discount Rate
1,400
Discount
Rate 7%
1,200
1,000
800
600
400
200
0
AEO 2010:
Base Case
AEO 2013:
Base Case
SPR Net Revenue
Avoided Net Import Costs
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Avoided GDP Losses
AEO 2013:
High Oil Price
Case
AEO 2013:
AEO 2013:
AEO 2013:
Low Oil Price Lower U.S. Oil Higher U.S. Oil
Case
Resources Case Resources Case
NPV over 2013-2043
Sensitivity Cases with Uncertainty Ranges
(Annual U.S. Benefits per Barrel of Emergency
Stockpiling, Variations on AEO2013 Base Outlook)
140
$/BBL/Yr., Undiscounted
120
100
80
60
40
Base
Base
Sensitivity
of GDP
Sensitivity
ofto
Oil Price
GDP to Oil
Price
Price Elasticity of
SR
Price
Demand
Elasticity of
Demand
Capacity
(base=50%)
Low
(Base: 2
MMBD)
Obligated
Obligated Industry
Stock Availability
Industry
Stock
(Base: 100%)
Availability
(Base: 100%)
Mean
Undiscounted U.S. Benefits in $/BBL/Yr of U.S. Storage.
Higher demand elasticities case.
0%
100%
0%
3 MMBD
1 MMBD
SaudiArabia
Arabian
Drawdown
Saudi
Spare Drawdown
Threshold
Spare (Base: 50%) Threshold
Capacity
(Base: 2 MMBD)
High
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75%
25%
125% of Base
75% of Base
150% of Base
Base
0
50% of Base
20
NonU.S. IEA
Non-U.S.
Stock
IEA
Stock
AvailaAvailability
bility
(Base:
(Base:
100%)
100%)
4. Conclusions
 Shock costs (& stock benefits) decrease with U.S.
Imports, but not completely
 Core conclusion:
– While wealth transfer caused by oil shocks is much-decreased in some futures,
– The GDP impact of oil shocks could still prove greatly harmful so long as U.S. is
major oil consumer and integrated with global market
 Other unquantified benefits strategic oil stockpiles such
as the deterrent capability and added foreign policy
freedom that they give to importer governments, arguably
unchanged by imports
 Sensitivity of these results
– Short-run demand elasticity and GDP sensitivity to shock
– Level of global spare oil production capacity
– Threshold at which drawdowns are initiated
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Limitations, Outstanding Issues for Future
Work
 Problems with understanding spare capacity,
supplier risk
– Need for renewed examination of global disruption
risks
 Importance of how market flexibility, and GDP
sensitivity to shocks, may be evolving
– Consider evidence of declining demand elasticities
 Hard to understand short-run elasticities for potential
unprecedented large disruptions, emergency conditions
– Still need for further study of how macroeconomic
sensitivity to oil shocks may be changing
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Thank You!
[email protected]
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SUPPLEMENTARY SLIDES
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Recent Arguments that Oil Demand
Becoming More Inelastic

Related work e.g. by Hughes et al., 2008; Dargay & Gately, 2010; Baumeister
and Peersman, 2011

Multiple explanations are offered for this trend:
– The low hanging fruit (of energy conservation/substitution) already picked

Becomes more difficult to reduce quantities demanded as prices increase.

Elimination of large amount of dual-fired electric generation capacity, Low fraction used in electricity generation
– Increased/increasing fraction of oil consumed by non-OECD countries
 non-OECD countries are (or, at least, have been until now) more inelastic than OECD
– Increased/increasing fraction of oil consumed in the transportation sector
 more inelastic than the average elasticity across all uses (Dargay and Gately, 2010)
– As transportation fuel efficiency increases, less fuel-price-elastic (Hughes et al., 2008)
– Changes in the way oil trading is conducted. (Baumeister and Peersman, 2011)
– Complex interplay between the supply and demand sides of the market:
 OPEC producers realized in the 80s that demand had become less responsive, slowed
capacity additions
 Give shrinking spare capacity, consumers become more risk averse, precautionary
demand increases (Baumeister and Peersman, 2011)
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Update on compiling oil price-GDP elasticities:
Surveyed recent literature, focused on 13
applicable studies
1.
Alessandro Cologni and Matteo Manera (2008) Oil Prices, Inflation and Interest Rates in a Structural Cointegrated
VAR Model for the G-7 Countries. Energy Economics 30 (2008) 856–888
2.
Makena Coffman (2010) Oil price shocks in an island economy: an analysis of the oil price-macroeconomy relationship.
Ann Reg Sci (2010) 44:599–620 DOI 10.1007/s00168-008-0271-6
3.
Marcelo Sánchez (2011) Oil shocks and endogenous markups: results from an estimated euro area DSGE model. Int
Econ Econ Policy (2011) 8:247–273 DOI 10.1007/s10368-010-0159-7
4.
Surender Kumar (2009) The Macroeconomic Effects of Oil Price Shocks: Empirical Evidence for India. Economics
Bulletin 29(1): 15-37
5.
Luis J. Álvarez, Samuel Hurtado, Isabel Sánchez, Carlos Thomas (2010). The impact of oil price changes on Spanish
and euro area consumer price inflation. Economic Modelling 28 (2011) 422–431
6.
Lutz Kilian. A Comparison of the effects of exogenous oil supply shocks on output and inflation in the G7 countries.
Journal of the European Economic Association 6 (1): 78-121
7. Levent Aydin, Mustaf Acar. Economic impact of oil price shocks on the Turkish economy in the coming decades: A
dynamic CGE analysis. Energy Policy 39 (2011) 1722–1731
8.
Limin Dua, Yanan He, Chu Wei. The relationship between oil price shocks and China’s macro-economy: An empirical
analysis. Energy Policy 38 (2010) 4142–4151
9.
Gert Peersman, Ine Van Robays. Cross-country differences in the effects of oil shocks. Energy Economics xxx (2011)
xxx–xxx (In Press)
10. Christian Lutz, Bernd Meyer Economic impacts of higher oil and gas prices: The role of international trade for
Germany. Energy Economics 31 (2009) 882–887
11. Iikka Korhonen, Svetlana Ledyaeva. Trade linkages and macroeconomic effects of the price of oil. Energy Economics
32 (2010) 848–856
12. Katsuya Ito. The Impact of Oil Price Hike on the Belarusian Economy. Transit Stud Rev (2010) 17:211–216 DOI
10.1007/s11300-010-0140-8
13. Ana Gómez-Loscos, Antonio Montañés, M. Dolores Gadea. The impact of oil shocks on the Spanish economy. Energy
Economics 33 (2011) 1070–1081
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Study Data Covers mostly OECD economies
Estimates of the Annual oil price-GDP elasticity from the recent
literature (percent change in GDP for a doubling of the oil price)
High
Low
Mean
• Estimates were annualized
• Substantial variation across studies and regions
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Belarusia
Belgium
Finland
Netherlands
Russia
OPEC
Norway
Australia
Switzerland
China
Turkey
Spain
India
Euro Area
Hawaii
USA
UK
Japan
Italy
Germany
France
Canada
10%
8%
6%
4%
2%
0%
-2%
-4%
-6%
-8%
-10%
Explored Extrapolation of Study
Estimates to Other Countries/Regions on
Basis of Determinants of Vulnerability
• Regressed GDP elasticities from study results against
commonly hypothesized indicators of country vulnerability:
• Energy intensity of GDP (Energy/GDP)
• Oil intensity (Oil Consumption/Energy consumption)
• Oil imports (Oil Imports/Oil Consumption)
• These indicators can only partially explain variations in
estimated GDP elasticities, not surprisingly
• R2 ~50%
• Weak significance (except Oil intensity)
• Relationship may be explored further, but current version
provides guidance for adjusting average IEA elasticities to
Non-IEA.
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Oil Intensity of U.S. GDP
Oil Intensity of U.S. GDP
6%
5%
% Value Share
4%
3%
AEO 2010 Base Case
AEO 2013 Base Case
AEO 2013 High Oil Price Case
AEO 2013 Low Oil Price Case
AEO 2013 Lower Oil Resources Case
AEO 2013 Higher Oil Resources Case
Historic
2%
1%
0%
2000
2005
2010
2015
2020
Year
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2025
2030
2035
2040
EMF 2005 Semi-Continuous Disruption Probabilities
Inverse Cumulative Probability Disruption Distribution
Year 2020
30%
Saudi Arabia
Other Persian Gulf
West of Suez
Russia and Caspian Region
Total At Risk Supply
Probability of Disruption >= X%
25%
20%
15%
10%
5%
0%
0%
2%
4%
6%
8%
10%
12%
X% of Year 2020 World Supply
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14%
16%
18%
20%
EMF 2005 Discrete Disruption
Probabilities
Event Probabilities
Note:
Saudi Arabia
Saudi Arabia
Saudi Arabia
Saudi Arabia
West of Suez
West of Suez
West of Suez
West of Suez
Other Persian Gulf
Other Persian Gulf
Other Persian Gulf
Other Persian Gulf
Russia and Caspian Region
Russia and Caspian Region
Russia and Caspian Region
Russia and Caspian Region
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Size/Length
3
12
18
Any
3
12
18
Any
3
12
18
Any
3
12
18
Any
0.00%
50%
22%
23%
95%
32%
45%
14%
91%
34%
28%
27%
88%
87%
8%
3%
97%
20.00%
2.74%
0.43%
0.21%
3.38%
4.48%
2.78%
0.13%
7.38%
7.62%
1.80%
0.61%
10.03%
2.16%
0.03%
0.00%
2.18%
50.00%
0.62%
0.13%
0.07%
0.83%
0.82%
0.74%
0.06%
1.63%
0.78%
0.39%
0.19%
1.35%
0.46%
0.01%
0.00%
0.47%
90.00%
0.22%
0.07%
0.06%
0.35%
0.03%
0.03%
0.00%
0.07%
0.09%
0.05%
0.03%
0.16%
0.00%
0.00%
0.00%
0.00%
Basis for Excess Capacity Assumptions
 IEA, EIA, is consistent
with other estimates

"Saudi Arabia will continue with its
current plan to maintain spare
production capacity at levels between
1.5 and 2.0 million barrels per day."
EIA's International Energy Outlook
2011, p. 35

"'Given that the kingdom has total
production capacity of 12.5 million b/d,
of which 72% is currently being
exploited, actual production to end
2030 will be maintained at this
assumed level within this available
capacity,' he added. 'This will be
enough to meet anticipated production
[requirements] while maintaining
through this period spare capacity that
will reach 1.7 million b/d by 2030, within
the kingdom's declared aim of
maintaining spare capacity of 1.5-2
million
b/d,' Moneef said." Platts - 2011
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Future Saudi Arabian Effective Spare
Capacity (MMBD)
Source: IEA, Discussion May, 2013.
Saudi Arabia
Other Persian Gulf
West of Suez
OPEC Total
2.00
0.58
0.25
2.83
Average Effective Spare Capacity Share
(2007-2011)
Saudi Arabia
Other Persian Gulf
West of Suez
71%
21%
9%
U.S. Liquid Fuels Supply
U.S. Liquid Fuels Supply
25
MMBD
20
AEO 2010 Base Case
AEO 2013 Base Case
AEO 2013 High Oil Price Case
AEO 2013 Low Oil Price Case
AEO 2013 Lower Oil Resources Case
AEO 2013 Higher Oil Resources Case
Historic
15
10
5
0
2000
2005
2010
2015
2020
Year
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2025
2030
2035
2040
U.S. Liquid Fuels Demand
U.S. Liquid Fuels Demand
25
MMBD
20
15
AEO 2010 Base Case
AEO 2013 Base Case
AEO 2013 High Oil Price Case
AEO 2013 Low Oil Price Case
AEO 2013 Lower Oil Resources Case
AEO 2013 Higher Oil Resources Case
Historic
10
5
0
2000
2005
2010
2015
2020
Year
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2030
2035
2040
Annual U.S. Benefits of Emergency Oil
Stockpiling: AEO2013 High and Low Oil
Price Cases (with Base)
Annual
U.S. Benefits
of IEA Emergency
Oil Stockpiling
U.S.
Benefits
of IEA Emergency
Oil Stockpiling
Undiscounted
$2010,
Undiscounted
Billions
$/BBL,
6090
80
50
70
AEO 2013:
2013: Base
Base Case
Case
AEO
AEO 2013:
2013: High
High Oil
Oil Price
Price Case
Case
AEO
AEO 2013:
2013: Low
Low Oil
Oil Price
Price Case
Case
AEO
4060
50
30
40
2030
20
10
10
00
2010
2010
2015
2015
2020
2020
2025
2025
Year
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Undiscounted
2030
2030
2035
2035
2040
2045
U.S. Benefits of IEA Emergency Oil
Stockpiling are Asymmetrically Distributed
(Mean and 95% Confidence Interval, AEO 2013 Base Case)
Annual U.S. Benefits of IEA Emergency Oil Stockpiling
Mean and 95% Confidence Interval
550
500
Billions $2010, Undiscounted
450
400
350
Upper CI
300
Mean
250
Lower CI
200
150
100
50
0
-50
2010
2015
2020
2025
Year
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2030
2035
2040
2045
Variant Studies: Cost Benefit Analysis Crude Mix,
Regional Oil Stocks, and/or Product Reserve
 General idea is to consider relative merits of
–
–
–
–
Crude Oil Stocks in U.S. Gulf region
Heating Oil Stocks in Northeast
Gasoline Stocks in West Coast, or inland from Gulf Coast
Alternative Regional Energy Security measures
 For Crude oil stocks, a related question is “Crude Mix”
– Past ICF and ORNL studies indicated refinery flexibility sufficient to accommodate
wide crude mix, but these conclusions may no longer be valid
 Regional Petroleum Product Reserve
– Early 1990s ORNL“RPPR” Study highlighted distinct
economic and risk implications of regional product stocks
– 1997 revisitation
– Major new study completed 2010-2011 focusing on Hurricane
risk
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for the Department of Energy
2011 RPPR Study: Assess the need for a
Southeast Refined Petroleum Product Reserve
to address hurricane related product supply
shortages.
Analysis For
Each Hurricane
Season
Hurricane Activity
(Number, Timing,
Category, Landfall
location)
Gulf Coast
Refinery Outages
Product Price
Increases
(Category,
Ref. Proximity)
(With and
Without RPPR)
Capline
Gulf Coast Hurricane Vulnerability
7 Refiners
Capacity
1,817 MBD
9 Refiners
Capacity
2,325 MBD
HOUSTON
Expected Reduction in GDP Losses over 30
Years for 30 MMB RPPR by Region
2 Refiners
Capacity
410 MBD
11 Refiners
Capacity
2,347 MBD
PORT
ARTHUR
Big
Hill
NEW
ORLEANS
Bayou
Choctaw
PASCAGOULA
West
Hackberry
Odyssey
Mountaineer
TEXAS CITY
4 Refiners
Capacity
688 MBD
Bryan
Mound
FREEPORT
LOOP
Mars URSA
SS 332
CORPUS CHRISTI
Devil’s
Tower
Droshky
Auger
Tahiti
Constitution
Ticonderoga Poseidon
Mad
Dog
Perdido
Gulf of
Mexico
St. Malo
Jack
Neptun
e
Shenzi
Atlantis
0.07%
($0.58b)
0.05%
($0.24b)
BATON
ROUGE
LAKE
CHARLES
GDP Losses
Petronius
0.04%
($1.05b)
0.06%
($2.19b)
Blind Faith
Thunder Hawk
Thunder Horse
U.S Department of Energy
Strategic Petroleum Reserve Program
Washington, D.C. 20585
Platform
0.08%
($1.33b)
0.06%
($1.65b)
0.08%
($1.79b)
Offshore Port
Refinery
Cascade
Chinook
Major Pipeline
SPR Site
SPR3315.PPT
Study Conclusion: Analysis supported a reserve of at least 30 million barrels.
37 Managed by UT-Battelle
for the Department of Energy
Stockpile Benefits Spillover, But “Public
Good” Analogy is Inadequate
 Spillover means some “Global Public Good”
properties
– But many benefits, e.g. import cost savings and particularly
non-economic and indirect benefits, flow to stock owners
 Use care, Some game-theory analogies poor
 E.g. “Common property” and “Prisoners Dilemma”
– “Access” (stock use) not guaranteed
 Cooperating means sharing in drawdown decision
– “Free-riding” (non-cooperation) not a good strategy.
 Can show:
– Gains of Free Ride much less than Losses if No Ride is
provided
38 Managed by UT-Battelle
for the Department of Energy
38
Leiby 11/06/2007
Summary: Insights from Past Singlecountry and Cooperative Stock Analyses
 Oil Market is Unstable, and Oil Shocks Matter
– True for essentially all world consuming regions
 Economic value to stock expansion for many large
regions
 Benefit-payoff structure supports (in some cases,
requires) collaborative stockpiling initiatives.
– Collective groups of countries sharing a reserve prefer larger
size and
– achieve greater benefits than the sum of individual countries
acting alone
 Longer run demand reduction and flexibility worthwhile
 Diplomatic actions and relations are critical
39 Managed by UT-Battelle
for the Department of Energy
39
Leiby 11/06/2007
Main Assumptions
 Disruption Risks
– EMF/Huntington/Beccue 2005
 Demand Elasticities
 GDP response to prices
– Estimated range, based on prior studies and review of
recent literature (range -0.0316 to -0.0086, Mean -0.024)
 Excess capacity ~2.8 MMBD
 Drawdown threshold: 2.0 MMBD
40 Managed by UT-Battelle
for the Department of Energy
Annual per Barrel U.S. Benefits of
Emergency Stockpiling for a Variety of
Sensitivities

Sensitivity to GDP Elasticity w.r.t. Price
–

Price Elasticity of Demand
–

Base assumes all net disruptions above a hypothetical 2 MMBD threshold addressed if possible. Raising
draw threshold increases exposure to smaller but more numerous and still damaging disruptions. Lowering
the threshold results in more frequent intervention.
IEA Obligated Industry Stocks
–

Uncertainty surrounds size and likely of Saudi drawdown. Increase in draw % reduces the need for reserves
and therefore the benefits.
Drawdown Threshold
–

Also important. Base case from Dargay and Gately (2010). Several studies points towards recent move to oil
demand being more inelastic.
Saudi Arabia Spare Capacity
–

An important sensitivity, Base case assumes triangular distribution based upon meta study.
Assumed to be ~800 MMB and capable of very fast drawdown. Diminishing returns to emergency stocks
means that increasing availability is less beneficial than damage from reducing it.
Non-U.S. Emergency Stock Availability
–
U.S. acts alone. Loss 1,300 MMB Non-U.S. IEA stocks (Public + Available Industry Stocks) results in loss of
spillover benefits and reduced ability to cover disruptions in terms of both size and length.
41 Managed by UT-Battelle
for the Department of Energy
Evolving Demand Elasticity and Market
Responsiveness [???draft]

Factors cited for declining demand elasticity (e.g. Hughes et al., 2008; Dargay and Gately, 2010)
–

xxx
Possible sources of increasing demand elasticity
–
–
Dahl’s cross-country comparison finds gasoline demand elasticity increases with price and with income
(diesel, she elasticities decrease with income)
A significant increase in dual/flex-fueled vehicles (e.g., FFVs, PHEVs) could be another mechanism for
increasing oil demand elasticity

Note IMF 2011 annual elasticity value

World oil demand elasticities Frequency of data used
demand elasticity

Dargay and Gately (2010) plus IEO 2011
elasticity in production 2013)
Annual
1971-2008 -0.24 (constructed value for

Baumeister and Peersman (2011)
for elasticity in production 2010)
Quarterly
1974-2010 -0.1 (estimated posterior median
–
–
Period of analysis
-0.26 (average posterior median for elasticity in production 1974-2010)
show notably declining demand elasticities in recent years (about -0.1 in 2005-2010)

Killian and Murphy (2012)
for 1973-2008)[1]

Plenty of support for the idea of decreasing elasticities over the last few decades
–
–
Oil
Monthly
1973-2008 -0.26 (posterior median for elasticity in use
Alternative view from recent Killian and Murphy 2012 paper is an outlier
Baumeister and Peersman (2011) uses similar approach focusing on time-varying elasticity, and show notably
declining demand elasticities in recent years (about -0.1 in 2005-2010)
42 Managed by UT-Battelle
for the Department of Energy