Trouble viewing? Open in web browser.

Journalist Resources Stanford News Stanford Experts Contact Us
Stanford University homepage

News Service

October 3, 2005

Disruptions in foreign oil likely, study finds; may affect fuel prices more than Katrina and Rita

Your odds of drawing a club, diamond or heart from a shuffled deck of playing cards are three out of four. The odds of a foreign oil disruption happening over the next 10 years are slightly higher, and policymakers should prepare for such an event, assert experts organized by Stanford University's Energy Modeling Forum in a risk-assessment study funded by the U.S. Department of Energy. The study is available on the web at http://www.stanford.edu/group/EMF/publications/doc/EMFSR8.pdf.

The working group of two dozen experts from academia, industry and government estimated an 80 percent chance that surprise geopolitical, military or terrorist turmoil would remove at least 2 million barrels per day—an amount representing about 2.1 percent of expected global oil production—during the disruption.

"Foreign disruptions of this magnitude will have more serious effects on oil prices and the economy than we have seen with Katrina and Rita," said Hillard Huntington, executive director of the Energy Modeling Forum. "Oil prices will rise more, and for longer than a few months or a heating season."

In the study, experts estimated the amount of oil lost to the market as the number of barrels removed by the initial disruption, minus any offsets from the use of excess capacity from undisrupted regions. The experts were asked to exclude any releases from the U.S. Strategic Petroleum Reserve, as these actions require separate decisions from the government during an emergency.

The study also expected disruptions even greater than those removing 2.1 percent of the world's oil supplies, but these larger disruptions have smaller odds of happening. For example, there's a 65 percent chance of events removing 3.2 percent of world oil supplies at least once during the next decade. There's a smaller chance—50 percent—of larger disruptions removing 5.3 percent of world oil supplies.

The study identified four major supply regions where disruptions are most likely. These regions collectively account for about 60 percent of total world oil production. The study lumped Algeria, Angola, Libya, Mexico, Nigeria and Venezuela as the first region, called "West of Suez." Saudi Arabia was the second region, and other Persian Gulf states—Iran, Iraq, Kuwait, Qatar, United Arab Emirates and Oman—were the third. Russia and the Caspian states made up the fourth region.

The riskiest areas were the Persian Gulf countries outside of Saudi Arabia and several countries along the Atlantic Basin, such as Nigeria and Venezuela. The least risky area was Russia and the Caspian states. Although the researchers found the possibility of disruptions was lower in Saudi Arabia than in other vulnerable regions, disruptions there would tend to have larger effects.

The study employed a structured framework based on decision and risk analysis techniques to quantify complex oil-disruption scenarios. This approach allowed experts to adjust their assessment when changes occurred in important underlying conditions, such as the extent of military conflict in the Middle East.

Disruptions were defined as the removal of oil supplies for one month or longer. While no effort was made in this study to estimate how much oil prices would rise or how the economy would respond, past oil disruptions have caused very rapid, large oil price increases and economic recessions.

A separate report now issued by the Energy Modeling Forum (http://www.stanford.edu/group/EMF/publications/doc/EMFSR9.pdf) found that available studies estimated considerably larger economic consequences when oil prices changed quickly and unexpectedly rather than gradually. Sudden oil price changes surprise households and firms and cause widespread uncertainty, unemployment and idle industrial capacity. The economy will grow more slowly and may even enter a recession if it is already experiencing other problems, such as fears of growing inflation, the scholars found.

"The results support reducing the country's future dependence on oil and improving the procedure for releasing the Strategic Petroleum Reserve during an emergency," Huntington said. "They provide an objective assessment of oil supply risks that can be used by other groups in evaluating specific policy options for reducing oil dependence—such as vehicle fuel efficiency standards, gasoline taxes, or research and development in alternative fuel technologies."

The Energy Modeling Forum was established in Stanford's School of Engineering in 1976 to help improve the use of modeling for understanding complicated energy and environmental public policy problems.

Editor Note:

The study is available on the Web at http://www.stanford.edu/group/EMF/publications/doc/EMFSR8.pdf. A photo of Huntington is available on the web at http://newsphotos.stanford.edu.

-30-

Contact

Dawn Levy, News Service: (650) 725-1944, dawnlevy@stanford.edu

Comment

Hillard Huntington, Energy Modeling Forum: (650) 723-1050, hillh@stanford.edu

Related Information

 

Update your subscription

  • Email: news-service@stanford.edu
  • Phone: (650) 723-2558

More Stanford coverage

Facebook Twitter iTunes YouTube Futurity RSS

Journalist Resources Stanford News Stanford Experts Contact Us

© Stanford University. Stanford, California 94305. (650) 723-2300.