Oil Security & The
Misperceptions of
Petro-nationalism
James M. Griffin
George Bush School of Government, Texas A & M
Presentation for
Shanghai University of Finance & Economics
June 18, 2014
Petro-Nationalists’ View of Oil
Security
 Two Key Premises:
 World will soon run out of oil and there’s no
economically reasonable substitute
 During Disruptions oil markets are/will be
geographically fragmented so that the
effects of disruptions will be localized
 Winners will be those that get oil!
The Petronationalist’s Policy
Prescriptions
 If possible, be oil independent
 If can’t be independent, buy oil from
secure countries
 Make long term bilateral deals with
various oil producing countries
guaranteeing oil supplies
 During disruptions, price controls are
good--they can immunize the economy
Alternative View of Oil Security
 World Market is one big bath tub

Oil Security is a World-wide Problem
 Most likely types of disruptions
Natural disasters
2) Internal instability within oil producing
country
3) Wars between adjoining oil producers
1)
Bath Tub Analogy
1
6
2
3
5
A
B
C
D
E
F
Why is World Oil Market One
Big Bath Tub?
 Oil tankers offer low cost worldwide
transportation
 No one producing or consuming country
can control market
Price of Crude Oil by Type:
1997-2007
Figure 3.3: Price of Crude Oil by Type, 1997-2007
90
80
60
50
40
30
20
10
Date
West Texas Intermediate
Alaska North Slope
Saudi Light
Malaysia Tapis Blend
Jan-07
Jul-06
Jan-06
Jul-05
Jan-05
Jul-04
Jan-04
Jul-03
Jan-03
Jul-02
Jan-02
Jul-01
Jan-01
Jul-00
Jan-00
Jul-99
Jan-99
Jul-98
Jan-98
Jul-97
0
Jan-97
Price ($) per Barrel
70
Implications of Petronationalists’
Strategy in a Stylized World
 A 1: Two exporting countries, 1 and 2, each




producing 50 barrels per day
A 2: Two oil consuming countries, A and B,
each consuming 50 barrels per day
A 3: Two oil producing countries: Country 1 is
secure and country 2 is insecure
A 4: Oil tankers can easily move crude between
countries at very low cost
A 5: Multiple Oil traders who arbritrage the
market
Stylized World
 A 6: Country 1 is located near country A and
country 2 is located near country B—so 1’s oil
goes to A and 2’s oil goes to B
 A 6: Short run price elasticity of demand is -.1
and long run elasticity is -1.0
 A 7: Both producing countries have a maximum
capacity just equal to market demand
Free Market: Oil Flows to
Nearest Buyer-Normal Period
Normal
Period
Country A
Country B
Country 1
(secure)
50
0
Country 2
(insecure)
0
50
World Price = $100
Free Market: Disruption in
Producing Country 2
Disruption
Period
Country A
Country B
Country 1
(secure)
25
25
Country 2
(insecure)
0
0
Price Spike: 500%
New World Price = $600
Country B Adopts Bilateral
Deal with 1--- Normal Period
Normal
Period
Country A
Country B
Country 1
(secure)
0
50
Country 2
(insecure)
50
0
World Price = $100
Country B Adopts Bilateral Deal with
1--- at fixed price, no trade with A
Disruption
Period
Country A
Country B
Country 1
(secure)
0
50
Country 2
(insecure)
0
0
A’s Price Spike: +1000%
B’s Price fixed at $100
But is this realistic?
 Wouldn’t country 1 renege on its
guarantee price of $100 to B?
 Even if not, oil traders would have huge
incentives to divert oil to Country A
 Would it be in B’s best interests to have
such a huge price shock in A given that
they are trading partners?
Country B Unilaterally Cuts
Consumption by 50% via a 100%
tariff--Normal Period
Normal
Period
Country A
Country B
Country 1
(secure)
37.5
0
Country 2
(insecure)
12.5
25
World Price = $100
B’s Domestic Price = $200
Country B Unilaterally Cuts
Consumption by 50%--Disruption
Period
Disruption
Period
Country A
Country B
Country 1
(secure)
33.3
16.7
Country 2
(insecure)
0
0
Price Spike: 330%
New World Price = $430
Country B becomes oil
independent @ $200 and
Country 1 can only produce 25
Disruption
Period
Country A
Country B
Country 1
(secure)
25
0
Country 2
(insecure)
25
0
Country B
0
25
Assume Disruption and B
refuses to export oil to A
Disruption
Period
Country A
Country B
Country 1
(secure)
25
0
Country 2
(insecure)
0
0
Country B
0
25
World Price +
500%
B’s price
unchanged
Assume Disruption and B
exports to A
Disruption
Period
Country A
Country B
Country 1
(secure)
25
0
Country 2
(insecure)
0
0
Country B
4
21
World Price +
420%
B’s price +
160%
Was Oil Independence &
Withdrawal from World Market
Rational?
 Cons:
 During Normal Period: Country B incurs high cost
to be oil independent hurting its exports
 During Disruption Period: Country B missed profits
of selling oil to A
 World trade consequences would be severe
 Pros:
 Only makes sense if A is an enemy
Keys to Oil Security
 Think a World Problem not a China or U.S.
Problem
 Think Bath Tub
 Want more faucets into Bath Tub
 Reduced world dependency on insecure oil
Keys to Oil Security
 Think of it as a World Problem not a China or
U.S. Problem
 Think Bath Tub
Implications of Bath Tub
 More faucets into bath tub the better
 Want a more secure mix of oil in bath
tub
Market Forces are Best Hope
for Oil Security
 Natural incentive to develop secure
supplies
 Natural incentive to hold emergency
supplies
 Avoid Price Controls –U.S. experience in
the 1970’s was a serious mistake
 Firms and consumers have remarkable
ability to adapt in emergencies