EDITORIAL The trade-security link
Recent behavior of oil inventories tells much about the changing dimensions of energy security. The revelation applies not just to the U.S., which has special difficulties in these areas, but also to any country with a vigorous economy and, therefore, steady thirst for petroleum.
At one time, security meant producing as much, and importing as little, as possible. It meant not just access to supply but physical control of it. That was certainly the guiding and futile prescription in the U.S.
But the U.S. has watched import dependency rise past the 50% level and seems none the worse for it. Japan has imported most of the oil and gas that it uses throughout its industrial history and somehow manages. Import dependency is not the gauge of energy security that it once was.
Strategic importance
This does not mean that petroleum has lost its strategic importance. There are simply security issues more crucial than import dependency about which companies and governments should worry.
Inventory behavior shows why. In the past few months, political uncertainties have intensified in, of all places, Saudi Arabia. According to old notions about security, acts of terrorism and power shifts in the world's premier oil producing country should have triggered panic buying for inventory. Everyone in the oil supply chain should have hoarded against the indeed dreadful prospect that Saudi production might cease.
Instead, inventories sank.
There are many explanations for this. Companies were taking inventory profits after a period of tight margins. Iraqi exports looked set to resume. Refiners were practicing "just-in-time" inventory management. Winter in industrialized countries of the Northern Hemisphere was especially cold.
Furthermore, no one expected Saudi production to cease. The kingdom has persistent revenue needs that it can meet only by producing oil. Those needs shape Saudi politics more than politics shapes Saudi production. As long as this is so, Saudi oil will flow at levels that best suit Saudi economic interests.
Indeed, conformance to economic imperatives rules most of the oil producing world. Saudi production is a big factor in worldwide supply-but it is just one factor among many. Saudi political uncertainties are reasons to be concerned but not to pay extra for physical control of crude.
In fact, there are now only two good reasons to hold inventories: 1) to meet operating requirements, and 2) to make money. As long as the market works and is broadly accessible, supply is available at some price. At the company level as well as the national, security comes more from trade than from physical control.
Countries such as the U.S. certainly should remain concerned about energy security. It should trouble oil and gas companies that so little of substance is said on the subject by officials these days.
Trade and security
What is even more troubling is that few in government seem to recognize the link between trade and security-the link that enables the market to shrug off fears about Saudi instability because of offsetting pressures, including new supply potential, elsewhere in the world. To the contrary, the U.S. now readily deploys the oil weapon in its foreign policy, embargoing oil purchases from disfavored exporters, and cajoles other consuming nations to follow suit. Official recognition of the threat this behavior poses to international oil trade-and, therefore, to national energy security-might yield policies more thoughtful and constructive.
Nowhere are the benefits of free and open trade more apparent than they are in the cases of oil and, increasingly, natural gas. The market's diminished tendency to hoard in times of uncertainty-evident in recent inventory numbers-is a money-saving example. Governments that sully oil trade compromise energy security and expose their economies to undue risk. Oil companies need to tell them so.
Copyright 1996 Oil & Gas Journal. All Rights Reserved.