Managing Oil Crises

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.