Baker Institute study assesses threats to oil market stability

Even as oil prices climb, threats to market stability are starting to abate, Amy Myers Jaffe told a May 21 energy forum at Rice University's James A. Baker III Institute for Public Policy in Houston.

By OGJ editors
HOUSTON, May 22 -- Even as oil prices climb, threats to market stability are starting to abate, Amy Myers Jaffe told a May 21 energy forum at Rice University's James A. Baker III Institute for Public Policy in Houston.

The institute's new study, "The Global Energy Market: Comprehensive Strategies to Meet Geopolitical and Financial Risks-The G8, Energy Security, and Global Climate Issues," identifies a series of policy frameworks that can be used to strengthen the current market system and ensure that it can respond flexibly to an array of possible threats.

The study assesses the US economy, financial markets, resource nationalism, terrorism, and climate change, as well as Iran's nuclear standoff, risk scenarios for Russian natural gas, dynamics in China and Iraq, the militarization of energy, and growth in transportation fuel demand.

Jaffe, an energy fellow at the Baker Institute, said the key finding in the study is that many of the risks driving today's oil price premium may be less catastrophic than they seem at first glance. And to achieve energy security—here defined as reducing the vulnerability to a reduction or cut-off of energy supplies—consumers must increase their elasticity of demand by increasing their flexibility and using alternative fuels.

Looking at cheap and available fuel supplies, the study says that while fuel subsidies in many countries are often justified on the grounds that they address income inequality and assist the poor, they mostly benefit the largest consumers of oil products, who are not society's poorest members.

It's in the US' interest to work with international institutions such as the International Monetary Fund to help oil states liberalize their domestic energy markets and begin to foster energy efficiency by easing subsidy programs, replacing them instead with more sound fiscal policies to aid their poor, the study says.

Regarding energy security issues, the study says that consuming countries benefit when global oil production comes from as diverse a base as possible. "Active policies that attempt to use bilateral influence, aid, conflict resolution assistance, and other diplomatic leverage to remove some of the barriers to investment and technology transfer to oil producers in Indonesia, Central Asia, Russia, Asia, and Africa could dramatically reduce the pressure on oil markets in the years to come," according to the study.

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