Tuesday, May 24, 2011

Measuring Energy Security: Trends in the Diversification of Oil and Natural Gas Supplies

Summary: We present evidence on one facet of energy security in OECD economies - the extent of diversification in sources of oil and natural gas supplies. Viewed from the perspective of the energy-importing countries as a whole, there has not been much change in diversification in oil supplies over the last decade, but diversification in sources of natural gas supplies has increased steadily. We document the cross-country heterogeneity in the extent of diversification. We also show how the extent of diversification changes if account is taken of the political risk attached to suppliers; the size of the importing country; and transportation risk.

This paper has presented evidence on the measurement and attainment of energy security in OECD  economies, with a focus on two major energy sources—oil and natural gas.  Following the literature, we take diversification in sources of supply to be an important aspect of this security. Our main results are as follows:

  • Viewed from the perspective of the energy-importing countries as a whole, diversification in oil supplies has remained constant over the last decade while diversification in natural gas supplies has steadily increased. Given the increasing importance of natural gas in world energy use, this points to an increase in overall energy security.
  • While there is great heterogeneity at the individual country level, diversification in sources of oil supplies has not increased for most countries since 1990, in contrast to the increase in diversification of natural gas supplies.
  • \An adjustment for the political risk associated with each supplier shows that countries‘ diversification has indeed increased over time, consistent with the popular perception. The large impact of this adjustment points to the importance of using alternate measures of risk; it would also be important to look at whether an energy exporter‘s political risk rating is informative about the risk that it will be the source of an energy supply disruption.
  • An adjustment for the country size of the importing coutnry (following Blyth and Lefevre) lowered measured energy security for the United States but did not impact other countries very much. An adjustment for the distance between energy-consuming and energy-producing countries, intended as a proxy for transportation risk, lowered energy security for countries in the Asia and Pacific regions.
  • An overall diversification index for oil and natural gas combined, using consumption shares of the two fuels as weights, has low values for the U.S. and the U.K, suggesting greater energy security compared with other countries such as Japan.  Within continental Europe there is much heterogeneity, with larger countries such as France and Germany having lower values of the index than smaller countries such as Finland and the Slovak Republic.
In future work, we plan to refine the diversification indices in numerous ways. These include taking into account energy sources other than oil and natural gas; accounting for interfuel substitution; accounting for each supplier‘s reserves rather than just the supplier‘s current production; and including vulnerability measures for infrastructure like import facilities, pipelines, and transmission lines, and refinery capability for petroleum products.

The full report is available free of charge at http://www.imf.org/external/pubs/ft/wp/2011/wp1139.pdf

By Gail Cohen, Frederick L Joutz, Frederick and Prakash Loungani
International Monetary Fund www.IMF.org
Working Paper Number 11/39; Published February 01, 2011; 40 Pages

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