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Managing Oil Crises

by Michael Levi
February 22, 2011

In an essay in tomorrow’s FT, I argue that ongoing oil market turmoil ought to remind us that energy policy shouldn’t just be about long-term strategy; short-term dynamics matter too. Most advocates have responded to the current situation with predictable calls to expand supply, curb demand, or develop alternatives, but none of these will do much in the next decade. The world also needs serious crisis management plans. The essay focuses on three elements: strategic reserve strategy; coordination of emergency measures with emerging markets (particularly China); and, more speculatively, possible curbs on market speculation during times of extraordinary geopolitical stress.

As with any op-ed, one must leave many things out. (Also, lest you be deceived by the headline, the piece isn’t only about Saudi.) Here are a few thoughts that didn’t make it in.

First, the standard line on when strategic reserves should be used confuses at least as much as it illuminates. Here’s the IEA’s David Fyfe: “Our view is this [strategic reserves] is not something that should be used in terms of price management”. But what is the line between price management and emergency response in a highly liquid global market? If distributed supply shutdowns cause prices to spike severely, but no one consumer is physically cut off, that should probably still be occasion to use the SPR.

Second, my three policy examples are only a subset of the issues that we’re neglecting through our singular obsession on the long term. Take Gulf of Mexico oil production. Those who say that GoM production is insignificant vis-à-vis long term oil prices are correct. But if the mess in the Middle East takes out a few million barrels a day of production, we may wish we’d been a bit more aggressive in finding ways to safely avoid curbing short-term production.

Third, the comments in my essay regarding controls on speculation are highly, um, speculative. We do not have the necessary research to properly understand how speculators would affect market response to a severe geopolitical disruption, nor do we have even a rudimentary understanding of the policy tools that might be available to respond. It behooves us, though, to think seriously about what might constitute wise policy under extreme circumstances.

Finally, op-eds don’t allow one to reference other (usually deeper) analyses of appropriate policy.  If you’re interested in strategic reserve policy in particular, take a look at David Victor and Sarah Eskreis-Winkler in Foreign Affairs, Michelle Billig and David Goldwyn in a very useful edited volume (alas, full text not available online), and this primer from CRS.

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  • Posted by milan milenkovic

    “Nation that lead in Clean – Energy economy , will be Nation that lead in 21. Century Global Economy”.

    We have to care / worry what kind of world we will leave to our children and next generations…

    Q: How many more years is estimate for extractible world’s oil supply under current population explosion and economic growth/ demand for oil…?

    A: On long term, it’s sure that oil and natural gas supply will continue to diminish and price will continue to increase, what can couse more world conflicts…

    This issue is so important for our economy… for us, our children, next generations, for USA future…

    Accourding to EIA and IEA, the world-wide energy consumption will on average continue to increase by 2% per year, what leads to doubling of the energy consumption every 35 years( ” USA have 2% of oil world reserve, and we consume 20% of it…probable 40% increase demand by 2030 …”).

    ( Climate change: DOE “ About 50 % Americans live in areas where levels of one or more air pollutants … are high enough to affect public health and/or the environment… ”
    ( air pollutants cause cardiopulmonal disease; death due aggravated asthma, bronchitis, emphysema, lung and heart disease… premature death…USA predicted to reduce greenhouse gas emission up to 17% from 2005. levels by 2020.).

    We have capacity to use, during TRANSITION ( next minimum 10 years) and for STORAGE , natural gas ( particularly shale gas ), and SAFE, clean nuclear power plants ( but do NOT forget that we lose between 7% and 9% of our power in the WIRES of our transmissions system). We need more:

    1. Photovoltaic power stations ( like De Soto , country’s largest solar Energy field in Arcadia, Florida and PV system “trees”…);

    2. ” Wind turbines can produce 20% of our E, during next 20 yr”- Pr Obama;

    3. automotive biofuel / FCHV / plug – in hybrids cars and car’s STATIONS , in all States ;

    – “ Put 1 million Plug-In Hybrid cars- cars built in USA, that can get up to 150 miles/gallon – on the road by 2015 .

    – High – speed , energy efficient trains, COST – TO – COST ( speed more than 200 miles/h, that could connect for example: LA to San Francisco in 2 and half hours…).

    ( Pr. Obama: “Due traffic congestions , $ 80 billion / yr we lost in productivity and waste of fuel”…);

    4. Biomass , Wave / ocean current …

    5. The Solar Decathlon, DC, already show solar-powered HOUSES ( in the future : Green BUILDINGS / Clean INDUSTRIES ) that will be self-sufficient: energy-efficient houses can produce enough electricity and hot water from solar panels, to run modern home ( with new efficiency standards for dishwashers and refrigerates)… This is particularly important because, today, ” Homes and other buildings account for 40% of the energy we use in the USA- more than we use in transportation or industry”…To improve this, Pr.Obama had excellent idea with “ Home stars program”…

    6. Fusion TORCH, antimatter, nuclear fusion…

    Conclusion: “ SMART MIX” of renewable E sources and Energy STORAGE technologies

    are the best options for our future. And, we have to SAVE energy , when we have it…

    Sec. Clinton: “Energy innovation is happening all over…Costa Rica, a country working to become the world’s first carbon-neutral country…We need sustainable and yes, profitable solutions… but which will also help us fight climate change….

    We identified critical areas of engagement ( with other countries): energy efficiency, renewable energy, cleaner fossil fuels, energy poverty, infrastructure… sustainable forestry / land use and adaptation to assist developing countries that have been and are being hardest hit by climate change”.

    – Break our addiction to foreign oil , to achieve energy independence :

    1) By 2035. , 80% of Energy should be produce by Clean E , Bio diesel …( “ currently, more than half of our oil comes from foreign sources; that figure is projected to rise to 68% in 2025 – DOE );

    2) we have to get at least 25 % of our electricity from renewable sources by 2020…

    ( electricity demands in USA will probable increase by 22% over next 20 years).

    3) One million electric cars on a road by 2015. New standards for cars / trucks: probable we can achieve for model year 2016, average 35,5 miles/gallon . That 40 % increase in fuel efficiency for our cars and trucks could save 1,8 billion barrel of oil…and a reduction of approximately 900 million metric tons in greenhouse gas emissions.

    4) Canada – Texas pipeline …

    Pr Obama: “ We can remain one of the world’s leading importers of foreign oil, or we can make the investments that would allow us to become the world’s leading exporter of renewable energy… Nation that lead in Clean – Energy economy , will be Nation that lead in Global Economy”.

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